Evaluation of alternative measures of underlying inflation for Argentina

Working papers | 2005 | N 1

Abstract

Monetary policymaking requires an adequate appraisal of price dynamics and reliable forecasts for short and medium term inflation. Since the relevant inflation for monetary policy purpose may not be adequately measured by conventional consumer price indexes, there is a need for core inflation measures that adequately reflect coordinated and persistent movements in the price level. With this aim, eight different measures of core inflation are constructed, based on i) re-weighting of CPI components in a new aggregate index according to the relative significance of each item as a signal of inflation, ii) excluding the most volatile CPI components, or directly those related to food and energy, considered to be less affected by monetary policy; iii) calculating a robust estimator of the first order moment for the cross sectional distribution of CPI inflation that excludes extreme values. These indicators are evaluated on the basis of their ability to predict consumer price inflation. The results indicate that the core inflation measure constructed according to criterion i) of signal extraction provides the core inflation measure with the best relative performance.