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The Distribution and Measurement of Inflation

Author

Listed:
  • Jonathan Kearns

    (Reserve Bank of Australia)

Abstract

Measured inflation records many shocks that are not representative of the persistent component of inflation. Several methods are used to construct measures of core inflation which abstract from these unrepresentative shocks; this paper focuses on trimmed means. Analysis of Australian CPI component price changes shows they are widely dispersed. Further, they are not normally distributed; there is a large proportion of extreme price changes (the distribution is fat-tailed) and the distribution is usually positively skewed. With an understanding of the behaviour of price changes, trimmed means are then developed. It is found that trimmed means provide a better measure of trend, or core, inflation when a large proportion of the distribution is removed. As a consequence of the distribution’s systematic positive skew, slightly more than half of the trim should be taken from the left-hand tail to ensure that the trimmed mean records average inflation equal to that of the whole CPI.

Suggested Citation

  • Jonathan Kearns, 1998. "The Distribution and Measurement of Inflation," RBA Research Discussion Papers rdp9810, Reserve Bank of Australia.
  • Handle: RePEc:rba:rbardp:rdp9810
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    File URL: http://www.rba.gov.au/publications/rdp/1998/pdf/rdp9810.pdf
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    References listed on IDEAS

    as
    1. Richard De Abreu Lourenco & David Gruen, 1995. "Price Stickiness and Inflation," RBA Research Discussion Papers rdp9502, Reserve Bank of Australia.
    2. Michael F. Bryan & Stephen G. Cecchetti, 1994. "Measuring Core Inflation," NBER Chapters,in: Monetary Policy, pages 195-219 National Bureau of Economic Research, Inc.
    3. Laurence Ball & N. Gregory Mankiw, 1995. "Relative-Price Changes as Aggregate Supply Shocks," The Quarterly Journal of Economics, Oxford University Press, vol. 110(1), pages 161-193.
    4. Michael F. Bryan & Stephen G. Cecchetti & Rodney L. Wiggins II, 1997. "Efficient Inflation Estimation," NBER Working Papers 6183, National Bureau of Economic Research, Inc.
    5. Stanley Fischer, 1981. "Relative Shocks, Relative Price Variability, and Inflation," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(2), pages 381-442.
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    Citations

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    Cited by:

    1. Gagik G. Aghajanyan, 2005. "Core inflation in a small transition country: choice of optimal measures," European Journal of Comparative Economics, Cattaneo University (LIUC), vol. 2(1), pages 83-110, June.
    2. Bermingham, Colin, 2006. "How Useful is Core Inflation for Forecasting Headline Inflation?," Research Technical Papers 11/RT/06, Central Bank of Ireland.
    3. Juan-Luis Vega & Mark A. Wynne, 2003. "A First Assessment of Some Measures of Core Inflation for the Euro Area," German Economic Review, Verein für Socialpolitik, vol. 4, pages 269-306, August.
    4. Meyler, Aidan, 1999. "A Statistical Measure Of Core Inflation," Research Technical Papers 2/RT/99, Central Bank of Ireland.
    5. Ivan Roberts, 2005. "Underlying Inflation: Concepts, Measurement and Performance," RBA Research Discussion Papers rdp2005-05, Reserve Bank of Australia.
    6. Mick Silver, 2006. "Core Inflation Measures and Statistical Issues in Choosing Among Them," IMF Working Papers 06/97, International Monetary Fund.
    7. Andrea Brischetto & Anthony Richards, 2006. "The Performance of Trimmed Mean Measures of Underlying Inflation," RBA Research Discussion Papers rdp2006-10, Reserve Bank of Australia.
    8. Luc Aucremanne & Guy Brys & Peter J Rousseeuw & Anja Struyf & Mia Hubert, 2003. "Inflation, relative prices and nominal rigidities," BIS Papers chapters,in: Bank for International Settlements (ed.), Monetary policy in a changing environment, volume 19, pages 81-105 Bank for International Settlements.
    9. Chris Aylmer & Troy Gill, 2003. "Business Surveys and Economic Activity," RBA Research Discussion Papers rdp2003-01, Reserve Bank of Australia.
    10. Vega, Juan Luis & Wynne, Mark A., 2001. "An evaluation of some measures of core inflation for the euro area," Working Paper Series 0053, European Central Bank.
    11. Edward P. Santos & Dennis S. Mapa & Eloisa T. Glindro, 2010. "Estimating inflation-at-risk (IaR) using extreme value theory (EVT)," Philippine Review of Economics, University of the Philippines School of Economics and Philippine Economic Society, vol. 47(2), pages 21-40, December.
    12. Dospinescu, Andrei Silviu, 2010. "Measuring Core Inflation in Romania Using the Dobrescu Method – A Comparative Approach," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(2), pages 308-319, July.
    13. Luc Aucremanne, 2000. "The use of robust estimators as measures of core inflation," Working Paper Research 02, National Bank of Belgium.
    14. Alexandra Heath & Ivan Roberts & Tim Bulman, 2004. "Inflation in Australia: Measurement and Modelling," RBA Annual Conference Volume,in: Christopher Kent & Simon Guttmann (ed.), The Future of Inflation Targeting Reserve Bank of Australia.
    15. repec:rba:rbabul:dec2017-04 is not listed on IDEAS
    16. Sadia Tahir, 2003. "Core Inflation Measures for Pakistan," SBP Working Paper Series 04, State Bank of Pakistan, Research Department.
    17. Zelda Blignaut & Greg Farrell & Victor Munyama & Logan Rangasamy, 2009. "A Note On The Trimmed Mean Measure Of Core Inflation In South Africa," South African Journal of Economics, Economic Society of South Africa, vol. 77(4), pages 538-552, December.

    More about this item

    Keywords

    core inflation; permanent/transitory shocks to inflation; moments of distribution of price changes;

    JEL classification:

    • C82 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Methodology for Collecting, Estimating, and Organizing Macroeconomic Data; Data Access
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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