UNECE Workshop on Consumer Price Indices Istanbul, Turkey,10-13 October 2011

1. UNECE Workshop on Consumer Price IndicesIstanbul, Turkey,10-13 October 2011 Session 12: Core inflation measurement methods Presentation by Carsten Boldsen, UNECE

2. Overview • What is core inflation • Exclusion based methods • Trend estimates • Limited influence estimators • Conclusion

3. What is core inflation? No general accepted definition of core inflation! It is usually associated with the idea of an underlying or long-term inflation, which is not disturbed by seasonal, erratic or one-time price variations. Normally used for inflation targeting by the monetary authorities High credibility of the measure is required

4. What is core inflation? t = t* + vt t : inflation measured by the CPI t* : core inflation vt: temporary disturbances • All information about t * should be utilised; only the noise (vt) should be excluded • It is difficult to distinguish signals and noise • Elements with noise may have a different trend than average, so that exclusion will bias the core inflation indicator

5. Different methods • Exclusion based methods- Products- Indirect taxes- One-off shocks- Domestically generated inflation- Imputation methods • Trend estimates • Limited influence estimators- The weighted median- trimmed means

6. Exclusion based methods Exclusion of products • Food and energy usually excluded Products can be excluded in two ways: • Exclude always the same products • Exclude products which are the most volatile Documentation of methods before publication is needed to ensure credibility

7. Exclusion based methods Exclusion of indirect taxes • Exclude tax changes, or • Exclude all indirect taxes – calculate a net price index One-off Schocks • Exclude extreme price changes caused by exogenous schocks Domestically generated inflation • Exclude imported products

8. Exclusion based methods Imputation methods • Exclude volatile products and impute their price change by products likely to experience similar price development • The idea is to keep the signal and exclude the noise

9. Trend estimates A commonly used multiplicative model is: CPIt = Tt * St * It Tt : Trend component St : Seasonal component It : Irregular component • The trend can be estimated by moving average, for example 24 months (but latest period is always missing) • The seasonal component can be estimated in regression models • Both trend and seasonal component included in most seasonal adjustment programs

10. Limited influence estimators Weighted median • Calculate the weighted median, which is less responsive to extreme price changes. This is a simple and transparent method Trimmed means: • Exclude specified upper and lower tails of the distribution of the 12-months price changes. For example, exclude 10% of the weights at the top and the bottom • In trimmed means indices large price changes are excluded, but smaller re-adjustments are included!

11. Some conclusions • All methods have their advantages and disadvantages • Some methods may work well in some period of time, but not in others • The role of the SNO should be clear and communicated to the public • Methods and sources should be transparent and documented and made publicly available