Exclusion-based and Reweighting-based Indicators of Core Inflation for Costa Rica

We evaluate the performance of new core inflation indicators for Costa Rica, computed through the exclusion or reweighting of the items in the CPI basket. We construct exclusion indicators based on the elimination of fixed categories of the CPI, as well as alternative versions of an indicator calculated by excluding articles according to their volatility, using data updated to December 2012. We also construct two types of reweighted indicators: one type using volatility measures and the other using persistence measures. Persistence reweighting is based either on the estimated spectrum of the series of price changes, three indicators based in an autoregressive coefficients methodology, a mean-reversion indictor, or an indicator based on the correlation of each series of price changes with variations in future inflation. For each indicator, we evaluate unbiasedness, fit to trend inflation, predictive ability and long-run behaviour. From the results of this evaluation, we recommend monitoring one of the volatility-weighted indicators and one of the persistence-weighted indicators.