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An Evaluation of Core Inflation Measures

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  • Jamie Armour

Abstract

The author provides a statistical evaluation of various measures of core inflation for Canada. The criteria used to evaluate the measures are lack of bias, low variability relative to total CPI inflation, and ability to forecast actual and trend total CPI inflation. The author uses the same methodology as Hogan, Johnson, and Laflèche (2001) and thus provides updated empirical results. The findings are that most traditional measures of core inflation are unbiased and all continue to be less volatile than total inflation. They nevertheless display some volatility and have limited predictive ability. Overall, CPIW seems to have a slight advantage over the other measures, but the differences across measures are not large. (CPIW uses all components of total CPI but adjusts the weight of each component by a factor that is inversely proportional to the component's variability.) Compared with the results of Hogan, Johnson, and Laflèche, CPIW's relative performance has improved. The distribution of price changes for 54 CPI subcomponents is also examined, and substantial increases in both the skewness and kurtosis of this distribution since 1998 are found.

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  • Jamie Armour, 2006. "An Evaluation of Core Inflation Measures," Staff Working Papers 06-10, Bank of Canada.
    • Handle: RePEc:bca:bocawp:06-10
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    References listed on IDEAS

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    2. Georgios Antonios Sarantitis & Theophilos Papadimitriou & Periklis Gogas, 2018. "A Network Analysis of the United Kingdom’s Consumer Price Index," Computational Economics, Springer;Society for Computational Economics, vol. 51(2), pages 173-193, February.
    3. Baqaee, David, 2010. "Using wavelets to measure core inflation: The case of New Zealand," The North American Journal of Economics and Finance, Elsevier, vol. 21(3), pages 241-255, December.
    4. Oğuz Atuk & Mustafa Utku Özmen, 2009. "Design and evaluation of core inflation measures for Turkey," IFC Working Papers 3, Bank for International Settlements.
    5. Kevin Clinton, 2006. "Core Inflation At The Bank Of Canada: A Critique," Working Paper 1077, Economics Department, Queen's University.
    6. Priyanka Sahu, 2021. "A Study on the Dynamic Behaviour of Headline Versus Core Inflation: Evidence from India," Global Business Review, International Management Institute, vol. 22(6), pages 1574-1593, December.

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    More about this item

    Keywords

    Inflation and prices;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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