The Distribution and Measurement of Inflation

Jonathan Kearns

RBA Research Discussion Papers from Reserve Bank of Australia

Abstract: 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.

Keywords: core inflation; permanent/transitory shocks to inflation; moments of distribution of price changes (search for similar items in EconPapers)
JEL-codes: C82 E31 (search for similar items in EconPapers)
Date: 1998-09
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Citations: View citations in EconPapers (27)

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