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The Distribution and Measurement of Inflation

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  • Jonathan Kearns

    (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.

Suggested Citation

  • Jonathan Kearns, 1998. "The Distribution and Measurement of Inflation," RBA Research Discussion Papers rdp9810, Reserve Bank of Australia.
    • Handle: RePEc:rba:rbardp:rdp9810
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    File URL: https://www.rba.gov.au/publications/rdp/1998/pdf/rdp9810.pdf
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    References listed on IDEAS

    as
    1. Shiratsuka, Shigenori, 1997. "Inflation Measures for Monetary Policy: Measuring the Underlying Inflation Trend and Its Implication for Monetary Policy Implementation," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 15(2), pages 1-26, December.
    2. Richard De Abreu Lourenco & David Gruen, 1995. "Price Stickiness and Inflation," RBA Research Discussion Papers rdp9502, Reserve Bank of Australia.
    3. Michael F. Bryan & Stephen G. Cecchetti, 1994. "Measuring Core Inflation," NBER Chapters, in: Monetary Policy, pages 195-219, National Bureau of Economic Research, Inc.
    4. Robert E. Hall, 1982. "Inflation: Causes and Effects," NBER Books, National Bureau of Economic Research, Inc, number hall82-1.
    5. Laurence Ball & N. Gregory Mankiw, 1995. "Relative-Price Changes as Aggregate Supply Shocks," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 110(1), pages 161-193.
    6. Michael F. Bryan & Stephen G. Cecchetti & Rodney L. Wiggins II, 1997. "Efficient Inflation Estimation," NBER Working Papers 6183, National Bureau of Economic Research, Inc.
    7. Stanley Fischer, 1981. "Relative Shocks, Relative Price Variability, and Inflation," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(2), pages 381-442.
    8. Scott Roger, 1997. "A robust measure of core inflation in New Zealand, 1949-96," Reserve Bank of New Zealand Discussion Paper Series G97/7, Reserve Bank of New Zealand.
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    More about this item

    Keywords

    core inflation; permanent/transitory shocks to inflation; moments of distribution of price changes;
    All these keywords.

    JEL classification:

    • C82 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Methodology for Collecting, Estimating, and Organizing Macroeconomic Data; Data Access
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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