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Alternative Measures of Core Inflation in Chile

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  • Felipe Córdova
  • María Carolina Grünwald
  • Michael Pedersen

Abstract

Inflation targeting central banks usually base their objectives on headline inflation, which is often affected by price movements of specific components whose behavior makes it difficult to extract clear signals about the inflationary outlook relevant for the monetary policy horizon. For this reason, several measures of underlying (core) inflation have been proposed with the purpose of removing this “noise”. This paper presents some alternatives calculated for the Chilean economy: three different measures that trim CPI components according to criteria of price changes and volatility, and two measures that re-weight the components according to historical volatility. In general terms, we find that the measures trimming away items with extreme price changes or high volatility are informative about the inflationary outlook given that they are unbiased with respect to the seasonally adjusted CPI and superior to other measures in tracking the headline inflation trend.

Suggested Citation

  • Felipe Córdova & María Carolina Grünwald & Michael Pedersen, 2008. "Alternative Measures of Core Inflation in Chile," Working Papers Central Bank of Chile 471, Central Bank of Chile.
    • Handle: RePEc:chb:bcchwp:471
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    File URL: https://www.bcentral.cl/documents/33528/133326/DTBC_471.pdf
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    1. repec:bla:germec:v:4:y:2003:i::p:269-306 is not listed on IDEAS
    2. Michael Pedersen, 2006. "An Alternative Measure of Core Inflation," Working Papers Central Bank of Chile 366, Central Bank of Chile.
    3. 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.
    4. Hodrick, Robert J & Prescott, Edward C, 1997. "Postwar U.S. Business Cycles: An Empirical Investigation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(1), pages 1-16, February.
    5. 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.
    6. Mick Silver, 2006. "Core Inflation Measures and Statistical Issues in Choosing Among Them," IMF Working Papers 2006/097, International Monetary Fund.
    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. M. Carolina Grünwald N. & Enrique Orellana C., 2004. "Medidas Alternativas de Inflación Subyacente," Notas de Investigación Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 7(1), pages 93-101, April.
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    Cited by:

    1. Camila Figueroa & Jorge Fornero & Pablo García, 2019. "Hindsight vs. Real time measurement of the output gap: Implications for the Phillips curve in the Chilean Case," Working Papers Central Bank of Chile 854, Central Bank of Chile.

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