## Relative Prices, Inflation and Core Inflation

_IMF Working Papers, March 1, 2000_

## Source details

**Canonical URL:** [Relative Prices, Inflation and Core Inflation](https://www.imf.org/en/publications/wp/issues/2016/12/30/relative-prices-inflation-and-core-inflation-3508)

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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

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### 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.

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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/30/relative-prices-inflation-and-core-inflation-3508_