Working Paper: NBER ID: w31032
Authors: Laurence M. Ball; Carlos Carvalho; Christopher Evans; Luca Antonio Ricci
Abstract: The standard measure of core or underlying inflation is the inflation rate excluding food and energy prices. This paper constructs an alternative measure, the weighted median inflation rate, for 38 advanced and emerging economies using subclass level disaggregation of the CPI over 1990-2021, and compares the properties of this measure to those of standard core. For quarterly data, we find that the weighted median is less volatile than standard core, more closely related to economic slack, and more closely related to headline inflation over the next year. The weighted median also has a drawback: in most countries, it has a lower average level than headline inflation. We therefore also consider a measure of core inflation that eliminates this bias, which is based on the percentile of sectoral inflation rates that matches the sample average of headline CPI inflation.
Keywords: core inflation; weighted median; economic slack; Phillips curve
JEL Codes: C43; E31; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| weighted median inflation (E31) | volatility (E32) |
| weighted median inflation (E31) | economic slack (E24) |
| weighted median inflation (E31) | headline inflation (12 months ahead) (E31) |
| standard core inflation (E31) | volatility (E32) |
| standard core inflation (E31) | economic slack (E24) |
| standard core inflation (E31) | headline inflation (12 months ahead) (E31) |