Core Inflation: A Review of Some Conceptual Issues

Abstract

This paper reviews various approaches to the measurement of core inflation that have been proposed over the years using the stochastic approach to index numbers as a unifying framework. It begins with a review of how the concept of core inflation is used by the world's major central banks, including some of the inflation-targeting central banks. The author provides a comprehensive review of many of the measures of core inflation that have been developed over the years and highlights some of the conceptual and practical problems associated with them. (JEL E31, C43)

Tracking Trend Inflation: Nonseasonally Adjusted Variants of the Median and Trimmed-Mean CPI

“…The implicit window of Rich and Steindel (2007) is longer than a decade; these authors remove all movements in inflation that are shorter than 8 years (32 quarters). 18 On these points, see also Brischetto and Richards (2007), Giannone and Matheson (2007), and Wynne (2008). 19 Using the Ashley-Verbrugge (2009) frequency-domain filter (in a two-sided manner) yields a series that is nearly identical.…”

“…While we constructed several alternative NSA median and trimmed mean CPI series starting in January 1983 and ending in March 2015, we will focus on a particular one, which adheres to BLS methods (see Appendix 6 for some additional details and results concerning the various alternative methodologies explored). To evaluate the usefulness of each trend inflation indicator, we use a set of criteria similar to those of Wynne (2008), Clark (2001), and Rich and Steindel (2007). 13 1.…”

“…On the topic of "core" measures, see also Rich and Steindel (2007), who state: "…we cannot identify a compelling analytical reason, on either an ex ante or ex post basis, to concentrate attention on a measure of inflation that excludes food and energy prices." Wynne (2008) provides a discussion about core inflation -a concept that will be termed "trend inflation" in this paper -and its measurement.…”

Measures of Underlying Inflation in Sri Lanka

“…A range of methodologies have been proposed in the literature to measure core inflation. As Wynne (2008) points out, the proposed methods are based either on cross-sectional information, or on time series or pooled cross-sectional and time series data. Methods based on the former attempt to refine the CPI by excluding volatile or transitory components, while the latter include time series methods aimed at removing high-frequency noise and econometric models that attempt to decompose the CPI into a core and non-core part.…”

“…A practical problem with these tests is that there is no consensus on the properties of core inflation. Some authors (inter alia Roger, 1998;and Wynne, 2008) emphasize the importance of the credibility of a core inflation measure, in particular when used as an inflation target, while others emphasize the importance of unbiasedness and predictive ability (see for example, Marques et al, 2000 and2003;Bryan and Cecchetti, 1993;and Mankikar and Paisley, 2004). In addition, Silver (2007) argues that different methods for estimating core inflation are designed for different purposes and thus that no single measure should be expected to meet every criteria.…”