Constructing U.K. Core Inflation

Terence C. Mills
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Terence C. Mills: School of Business and Economics, Loughborough University, Leicestershire, LE11 3TU, UK.

Econometrics, 2013, vol. 1, issue 1, 1-21

Abstract: The recent volatile behaviour of U.K. inflation has been officially attributed to a sequence of “unusual” price changes, prompting renewed interest in the construction of measures of “core inflation”, from which such unusual price changes may be down-weighted or even excluded. This paper proposes a new approach to constructing core inflation based on detailed analysis of the temporal stochastic structure of the individual prices underlying a particular index. This approach is illustrated using the section structure of the U.K. retail price index (RPI), providing a number of measures of core inflation that can be automatically calculated and updated to provide both a current assessment and forecasts of the underlying inflation rate in the U.K.

Keywords: core inflation; index numbers; signal extraction; time series modelling (search for similar items in EconPapers)
JEL-codes: B23 C C00 C01 C1 C2 C3 C4 C5 C8 (search for similar items in EconPapers)
Date: 2013
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