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A New Measure of Core Inflation in Pakistan

Author

Listed:
  • Riaz Riazuddin

    (State Bank of Pakistan)

  • Muhammad Amin Khan Lodhi

    (State Bank of Pakistan)

  • Muhammad Ashfaq

    (State Bank of Pakistan)

  • Behzad Ali Ahmad

    (State Bank of Pakistan)

Abstract

We propose a new method of permanently excluding relatively volatile commodities from CPI basket in Pakistan. This is achieved by making use of trimming approach on past data on monthly CPI changes to isolate a Relatively Stable Component of CPI (RSC-CPI) as a new measure of core inflation. This method ensures inclusion of both food and non-food commodities that show persistent price behavior in Pakistan. Three alternative core inflation series based on this new approach and four other core measures based on existing methodology have been evaluated. RSC-CPI based measures of core inflation are found to be the best in terms of desirable properties proposed by Marques et al (2003) for a core inflation measure and various relative performance indicators.

Suggested Citation

  • Riaz Riazuddin & Muhammad Amin Khan Lodhi & Muhammad Ashfaq & Behzad Ali Ahmad, 2013. "A New Measure of Core Inflation in Pakistan," SBP Working Paper Series 66, State Bank of Pakistan, Research Department.
    • Handle: RePEc:sbp:wpaper:66
    as

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    File URL: http://www.sbp.org.pk/repec/sbp/wpaper/wp66.pdf
    File Function: First version, 2013
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    References listed on IDEAS

    as
    1. Robalo Marques, Carlos & Duarte Neves, Pedro & Morais Sarmento, Luis, 2003. "Evaluating core inflation indicators," Economic Modelling, Elsevier, vol. 20(4), pages 765-775, July.
    2. Mr. James P Walsh, 2011. "Reconsidering the Role of Food Prices in Inflation," IMF Working Papers 2011/071, International Monetary Fund.
    3. Michael Pedersen, 2006. "An Alternative Measure of Core Inflation," Working Papers Central Bank of Chile 366, Central Bank of Chile.
    4. Muhammad Amin Khan Lodhi, 2007. "Evaluating Core Inflation Measures in Pakistan," SBP Working Paper Series 18, State Bank of Pakistan, Research Department.
    5. Alan K. Detmeister, 2012. "What should core inflation exclude?," Finance and Economics Discussion Series 2012-43, Board of Governors of the Federal Reserve System (U.S.).
    6. Anonymous, 2009. "Abstract of the discussion," British Actuarial Journal, Cambridge University Press, vol. 15(1), pages 202-217, March.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Muhammad Nadim Hanif & Javaid Iqbal & Syed Hamza Ali & Muhammad Abdus Salam, 2020. "Denoised Inflation: A New Measure of Core Inflation," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 9(2), pages 131-154.
    2. Zafar Hayat & Saher Masood, 2022. "Inflation Targeting Skepticism: Myth or Reality? A Way Forward for Pakistan (Article)," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 61(1), pages 1-27.

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    More about this item

    Keywords

    Core inflation measures; trimmed means; exclusion methods.;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • C4 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics

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