The Distribution and Measurement of Inflation
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.
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- Ball, L. & Mankiw, G.H., 1992.
"Relative-Price Change as Aggregate Supply Shocks,"
Harvard Institute of Economic Research Working Papers
1609, Harvard - Institute of Economic Research.
- Laurence Ball & N. Gregory Mankiw, 1993. "Relative-price changes as aggregate supply shocks," Working Papers 93-13, Federal Reserve Bank of Philadelphia.
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- Richard De Abreu Lourenco & David Gruen, 1995. "Price Stickiness and Inflation," RBA Research Discussion Papers rdp9502, Reserve Bank of Australia.
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"Efficient Inflation Estimation,"
NBER Working Papers
6183, National Bureau of Economic Research, Inc.
- Michael F. Bryan & Stephen G. Cecchetti, 1993.
"Measuring Core Inflation,"
NBER Working Papers
4303, National Bureau of Economic Research, Inc.
- 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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