Component-smoothed Inflation: Estimating the Persistent Component of Inflation in Real Time

Christian Gillitzer and John Simon
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Christian Gillitzer: Reserve Bank of Australia

RBA Research Discussion Papers from Reserve Bank of Australia

Abstract: This paper presents a new measure of underlying inflation: component-smoothed inflation. It approaches the problem of determining underlying inflation from a different direction than previous methods. Rather than excluding or trimming out volatile CPI items, it smoothes components of the CPI based on their volatility – CPI expenditure weights are maintained for all items. Items such as rent are smoothed a little, if at all, while volatile series such as fruit, vegetables and automotive fuel are smoothed a lot. This removes much of the temporary volatility in the CPI while retaining most of the persistent signal. Because our underlying inflation measure includes all CPI items at all times, it is robust to sustained relative price changes and is unbiased in the long run. A potential cost of this approach is that, unlike other measures, it places weight on lagged as well as contemporaneous prices for volatile series. An evaluation of the balance between the costs and benefits of this approach remains an open question.

Keywords: CPI; core inflation; underlying inflation; Australia; United States (search for similar items in EconPapers)
JEL-codes: E31 E52 (search for similar items in EconPapers)
Date: 2006-12
New Economics Papers: this item is included in nep-cba and nep-mac
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:rba:rbardp:rdp2006-11

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