What core inflation indicators measure?

Aleksandra Hałka and Grzegorz Szafrański

No 294, NBP Working Papers from Narodowy Bank Polski

Abstract: Whether excluding food and energy components from overall price indices produces a useful indicator for monetary policy purposes is widely debated. The proposals of model based measures of underlying inflation are scarce and the evidence on their performance is limited. In the paper the multidimensional performance of exclusion and model based core inflation indicators is compared in the period of persistently low inflation and interest rates. Providing new measures of underlying inflation we look for specific features of such indices as: tracking trend, appropriate smoothing, unbiasedness with respect to the cost-of-living index, good approximation of the demand pressure, and good short- to medium-term forecasting abilities. To this end, we extract permanent and transitory components of headline HICP and core inflation in the sample of 26 European Union countries for the period 2002-2016 using bivariate unobserved correlated components model and maximum likelihood estimator. We construct an aggregate performance measure, named Core Inflation Score, to capture different dimensions of underlying inflation indicators which could be of interest in monetary policy analysis.

Keywords: core inflation; unobserved correlated components model; forecasting inflation. (search for similar items in EconPapers)
JEL-codes: E31 E52 F62 (search for similar items in EconPapers)
Pages: 53
Date: 2018
New Economics Papers: this item is included in nep-eec, nep-mac and nep-mon
Note: We are grateful to the participants of 11th International Conference on Computational and Financial Econometrics, 1st International Conference on Econometrics and Statistics and Conference of the Scottish Economic Society.
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Persistent link: https://EconPapers.repec.org/RePEc:nbp:nbpmis:294

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