IDEAS home Printed from https://ideas.repec.org/a/taf/applec/v37y2005i3p339-345.html
   My bibliography  Save this article

Do underlying measures of inflation outperform headline rates? Evidence from Australian data

Author

Listed:
  • Lei Lei Song

Abstract

Many central banks often focus on underlying measures of inflation when assessing inflation trends. This paper compares the accuracy of underlying measures of inflation relative to the headline rates by using Australia data. It is found that the underlying measures did have smaller errors in predicting the long-term trend in inflation than the quarterly headline rate due to the volatility in the headline rate. As compared to the year-ended headline rate, the statistical test results, however, support only the measure of market prices excluding volatile items, not the others. There is some weak evidence of the weighted median measure outperforming the headline rate in the sub-period after 1993. With respect to directional accuracy, the test statistics cannot reject the null hypothesis of an equal probability correctly predicting the moving direction of the inflation trend, though the headline rates have a higher probability.

Suggested Citation

  • Lei Lei Song, 2005. "Do underlying measures of inflation outperform headline rates? Evidence from Australian data," Applied Economics, Taylor & Francis Journals, vol. 37(3), pages 339-345.
    • Handle: RePEc:taf:applec:v:37:y:2005:i:3:p:339-345
    DOI: 10.1080/0003684042000295322
    as

    Download full text from publisher

    File URL: http://www.tandfonline.com/doi/abs/10.1080/0003684042000295322
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1080/0003684042000295322?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Stephen G. Cecchetti & Erica L. Groshen, 2001. "Understanding Inflation: Implications for Monetary Policy," International Economic Association Series, in: Jacques Drèze (ed.), Advances in Macroeconomic Theory, chapter 7, pages 113-135, Palgrave Macmillan.
    2. Mark A. Wynne, 2008. "Core inflation: a review of some conceptual issues," Review, Federal Reserve Bank of St. Louis, vol. 90(May), pages 205-228.
    3. Diebold, Francis X & Mariano, Roberto S, 2002. "Comparing Predictive Accuracy," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 134-144, January.
    4. Stock, James H. & Watson, Mark W., 1999. "Forecasting inflation," Journal of Monetary Economics, Elsevier, vol. 44(2), pages 293-335, October.
    5. Quah, Danny & Vahey, Shaun P, 1995. "Measuring Core Inflation?," Economic Journal, Royal Economic Society, vol. 105(432), pages 1130-1144, September.
    6. Robert Dixon & G.C. Lim, 2004. "Underlying Inflation in Australia: Are the Existing Measures Satisfactory?," The Economic Record, The Economic Society of Australia, vol. 80(251), pages 373-386, December.
    7. Michael F. Bryan & Stephen G. Cecchetti, 1994. "Measuring Core Inflation," NBER Chapters, in: Monetary Policy, pages 195-219, National Bureau of Economic Research, Inc.
    8. Boskin, Michael J, et al, 1997. "The CPI Commission: Findings and Recommendations," American Economic Review, American Economic Association, vol. 87(2), pages 78-83, May.
    9. Michael F. Bryan & Stephen G. Cecchetti, 1993. "The consumer price index as a measure of inflation," Economic Review, Federal Reserve Bank of Cleveland, vol. 29(Q IV), pages 15-24.
    10. Jonathan Kearns, 1998. "The Distribution and Measurement of Inflation," RBA Research Discussion Papers rdp9810, Reserve Bank of Australia.
    11. Stephen G. Cecchetti, 1997. "Measuring short-run inflation for central bankers," Review, Federal Reserve Bank of St. Louis, issue May, pages 143-155.
    12. Harvey, David & Leybourne, Stephen & Newbold, Paul, 1997. "Testing the equality of prediction mean squared errors," International Journal of Forecasting, Elsevier, vol. 13(2), pages 281-291, June.
    13. N. Gregory Mankiw, 1994. "Monetary Policy," NBER Books, National Bureau of Economic Research, Inc, number greg94-1.
    14. Quah, Danny & Vahey, Shaun P, 1995. "Measuring Core Inflation?," Economic Journal, Royal Economic Society, vol. 105(432), pages 1130-1144, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Pablo Pincheira Brown & Nicolás Hardy, 2024. "Correlation‐based tests of predictability," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 43(6), pages 1835-1858, September.
    2. Jose Luis Nolazco & Pablo Pincheira & Jorge Selaive, 2016. "The evasive predictive ability of core inflation," Working Papers 15/34, BBVA Bank, Economic Research Department.
    3. Mohamed A. Osman & Rosmy Jean Louis & Faruk Balli, 2009. "Output gap and inflation nexus: the case of United Arab Emirates," International Journal of Economics and Business Research, Inderscience Enterprises Ltd, vol. 1(1), pages 118-135.
    4. Liam J. A. Lenten, 2010. "Bananas and petrol: further evidence on the forecasting accuracy of the ABS 'headline' and 'underlying' rates of inflation," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 29(6), pages 556-572.
    5. Pablo Pincheira-Brown & Andrea Bentancor & Nicolás Hardy, 2023. "An Inconvenient Truth about Forecast Combinations," Mathematics, MDPI, vol. 11(18), pages 1-24, September.
    6. Pincheira-Brown, Pablo & Selaive, Jorge & Nolazco, Jose Luis, 2019. "Forecasting inflation in Latin America with core measures," International Journal of Forecasting, Elsevier, vol. 35(3), pages 1060-1071.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Lei Lei Song, 2003. "The Role of the Unit of Analysis in Tax Policy Reform Evaluations," Melbourne Institute Working Paper Series wp2003n29, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
    2. Mick Silver, 2006. "Core Inflation Measures and Statistical Issues in Choosing Among Them," IMF Working Papers 2006/097, International Monetary Fund.
    3. Jamie Armour, 2006. "An Evaluation of Core Inflation Measures," Staff Working Papers 06-10, Bank of Canada.
    4. Riccardo Cristadoro & Giuseppe Saporito & Fabrizio Venditti, 2013. "Forecasting inflation and tracking monetary policy in the euro area: does national information help?," Empirical Economics, Springer, vol. 44(3), pages 1065-1086, June.
    5. Landau, Bettina, 2000. "Core inflation rates: a comparison of methods based on west German data," Discussion Paper Series 1: Economic Studies 2000,04, Deutsche Bundesbank.
    6. Dowd, Kevin & Cotter, John & Loh, Lixia, 2011. "U.S. Core Inflation: A Wavelet Analysis," Macroeconomic Dynamics, Cambridge University Press, vol. 15(4), pages 513-536, September.
    7. Marlene Amstad & Simon M. Potter & Robert W. Rich, 2017. "The New York Fed Staff Underlying Inflation Gauge (UIG)," Economic Policy Review, Federal Reserve Bank of New York, issue 23-2, pages 1-32.
    8. Juan‐Luis Vega & Mark A. Wynne, 2003. "A First Assessment of Some Measures of Core Inflation for the Euro Area," German Economic Review, Verein für Socialpolitik, vol. 4(3), pages 269-306, August.
    9. Robalo Marques, Carlos & Duarte Neves, Pedro & Morais Sarmento, Luis, 2003. "Evaluating core inflation indicators," Economic Modelling, Elsevier, vol. 20(4), pages 765-775, July.
    10. Le Bihan, Herve & Sedillot, Franck, 2000. "Do core inflation measures help forecast inflation?: Out-of-sample evidence from French data," Economics Letters, Elsevier, vol. 69(3), pages 261-266, December.
    11. repec:bla:germec:v:4:y:2003:i::p:269-306 is not listed on IDEAS
    12. Zelda Blignaut & Greg Farrell & Victor Munyama & Logan Rangasamy, 2009. "A Note On The Trimmed Mean Measure Of Core Inflation In South Africa," South African Journal of Economics, Economic Society of South Africa, vol. 77(4), pages 538-552, December.
    13. Ivan Roberts, 2005. "Underlying Inflation: Concepts, Measurement and Performance," RBA Research Discussion Papers rdp2005-05, Reserve Bank of Australia.
    14. Moreira, Ajax R. B. & Migon, Helio S., 2004. "Core Inflation: Robust Common Trend Model Forecasting," Brazilian Review of Econometrics, Sociedade Brasileira de Econometria - SBE, vol. 24(2), November.
    15. Alan Mankikar & Jo Paisley, 2004. "Core inflation: a critical guide," Bank of England working papers 242, Bank of England.
    16. Mark A. Wynne, 2008. "Core inflation: a review of some conceptual issues," Review, Federal Reserve Bank of St. Louis, issue May, pages 205-228.
    17. Carlos Felipe Jaramillo & Edgar Caicedo & Adolfo Cobo & Andrés González & Munir Jalil & Juan Manuel Julio & Luis Fernando Melo, 1999. "La Inflación Básica en Colombia: Evaluación de Indicadores Alternativos," Borradores de Economia 136, Banco de la Republica de Colombia.
    18. Jushan Bai & Serena Ng, 2004. "A PANIC Attack on Unit Roots and Cointegration," Econometrica, Econometric Society, vol. 72(4), pages 1127-1177, July.
    19. Rapacciuolo, Ciro, 2003. "Un semplice modello univariato per la previsione a breve termine dell'inflazione italiana [A simple model for the short term forecasting of Italian inflation]," MPRA Paper 7714, University Library of Munich, Germany.
    20. Bermingham, Colin, 2010. "A critical assessment of existing estimates of US core inflation," Journal of Macroeconomics, Elsevier, vol. 32(4), pages 993-1007, December.
    21. Scott Roger, 1998. "Core inflation: concepts, uses and measurement," Reserve Bank of New Zealand Discussion Paper Series G98/9, Reserve Bank of New Zealand.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:taf:applec:v:37:y:2005:i:3:p:339-345. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Longhurst (email available below). General contact details of provider: http://www.tandfonline.com/RAEC20 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.