Relative Prices, Inflation and Core Inflation
IMF Working Papers, March 1, 2000
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Bibliographic details
- Authors: Scott Roger
- Published: March 1, 2000
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451847857.001
Summary and main findings
- Empirical evidence on the distribution of relative price changes almost invariably reveals high kurtosis and a tendency toward right-skewness.
- Simple mixed distribution models including volatile and infrequently adjusted prices can account for:
- high kurtosis,
- right-skewness,
- correlation between the mean and variance of relative prices.
- In such circumstances, robust measures of central tendency are likely to outperform:
- the mean,
- standard measures of “core” inflation,
as indicators of generalized inflation.
- The analysis supports:
- the use of geometric averaging in CPI construction,
- targeting the geometric mean inflation rate rather than the Laspeyres mean.
Methodology and analytical approach
- Uses simple mixed distribution models that incorporate:
- volatile prices,
- infrequently adjusted prices,
to replicate common features of relative price change distributions (high kurtosis, right-skewness, mean–variance correlation).
Policy implications and recommendations
- Prefer robust measures of central tendency to the arithmetic mean or standard core-inflation measures when signaling generalized inflation under observed relative price distributions.
- Adopt geometric averaging methods in CPI construction.
- Consider targeting the geometric mean inflation rate instead of the Laspeyres mean for policy frameworks.
Content in this bundle
- Relative Prices, Inflation and Core Inflation - WP/00/58