A user point of view on core inflation measures Laurent Bilke Euro Area Macroeconomic Developments...
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Transcript of A user point of view on core inflation measures Laurent Bilke Euro Area Macroeconomic Developments...
![Page 1: A user point of view on core inflation measures Laurent Bilke Euro Area Macroeconomic Developments Division ECE/ILO meeting on CPI Geneve, 11 May 2006.](https://reader035.fdocuments.us/reader035/viewer/2022062322/5697bfa11a28abf838c957c6/html5/thumbnails/1.jpg)
A user point of view on core inflation measures
Laurent BilkeEuro Area Macroeconomic Developments Division
ECE/ILO meeting on CPIGeneve, 11 May 2006
![Page 2: A user point of view on core inflation measures Laurent Bilke Euro Area Macroeconomic Developments Division ECE/ILO meeting on CPI Geneve, 11 May 2006.](https://reader035.fdocuments.us/reader035/viewer/2022062322/5697bfa11a28abf838c957c6/html5/thumbnails/2.jpg)
Introduction
The need to remove short-term noise
Different ways to cope with this
To refer to core inflation measures is one of them
![Page 3: A user point of view on core inflation measures Laurent Bilke Euro Area Macroeconomic Developments Division ECE/ILO meeting on CPI Geneve, 11 May 2006.](https://reader035.fdocuments.us/reader035/viewer/2022062322/5697bfa11a28abf838c957c6/html5/thumbnails/3.jpg)
Outline
(1) Defining the noise with statistical criteria
(2) Three possible goals assigned to CI measures
(3) Assessing the properties of CI measures
(4) Illustration
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(1) Statistical criteria
• Statistical vs model based approaches
• How to define the noise?
• First possibility: noise= sector specific developments
– Most volatile items removed
– Idiosyncratic component identified and removed
– Extreme changes removed
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(1) Statistical criteria
• Second possibility: noise = less lasting developments
We remove the items with the lowest persistence
• Persistence
• Relationship persistence – variance, variance of the overall is:
> For a given item specific noise, low persistence implies low variance
![Page 6: A user point of view on core inflation measures Laurent Bilke Euro Area Macroeconomic Developments Division ECE/ILO meeting on CPI Geneve, 11 May 2006.](https://reader035.fdocuments.us/reader035/viewer/2022062322/5697bfa11a28abf838c957c6/html5/thumbnails/6.jpg)
(1) Statistical criteria
![Page 7: A user point of view on core inflation measures Laurent Bilke Euro Area Macroeconomic Developments Division ECE/ILO meeting on CPI Geneve, 11 May 2006.](https://reader035.fdocuments.us/reader035/viewer/2022062322/5697bfa11a28abf838c957c6/html5/thumbnails/7.jpg)
(1) Statistical criteria
• Two pitfalls:
(1) On the danger to exclude more than the noise
Trimmed mean: we can exclude some long-term evolutions
High tech goods or clothing
(2) On the danger to exclude once for ever
The case of energy
![Page 8: A user point of view on core inflation measures Laurent Bilke Euro Area Macroeconomic Developments Division ECE/ILO meeting on CPI Geneve, 11 May 2006.](https://reader035.fdocuments.us/reader035/viewer/2022062322/5697bfa11a28abf838c957c6/html5/thumbnails/8.jpg)
(1) Statistical criteria
Oil prices still pure noise?
Less volatile More persistent
![Page 9: A user point of view on core inflation measures Laurent Bilke Euro Area Macroeconomic Developments Division ECE/ILO meeting on CPI Geneve, 11 May 2006.](https://reader035.fdocuments.us/reader035/viewer/2022062322/5697bfa11a28abf838c957c6/html5/thumbnails/9.jpg)
(2) Three possible goals
• An indicator of current and future trends in inflation
• More or less emphasis can be placed on one side or the other (retrospective / prospective analysis)
• Emphasis on very short term developments: to remove the developments that we presume will be soon reverted – descriptive approach
• To predict inflation developments, x months ahead – leading indicator
• An intermediate: to point towards the trend, attractor
![Page 10: A user point of view on core inflation measures Laurent Bilke Euro Area Macroeconomic Developments Division ECE/ILO meeting on CPI Geneve, 11 May 2006.](https://reader035.fdocuments.us/reader035/viewer/2022062322/5697bfa11a28abf838c957c6/html5/thumbnails/10.jpg)
(3) How to assess the properties of CI?
• Depends on the assigned goal
• Descriptive approach
– Statistical criteria
• Same average than headline
• Lower variance
– Communication (Wyne, 99)
• Computable in real time
• Track record
• Understandable
• Stable in time
![Page 11: A user point of view on core inflation measures Laurent Bilke Euro Area Macroeconomic Developments Division ECE/ILO meeting on CPI Geneve, 11 May 2006.](https://reader035.fdocuments.us/reader035/viewer/2022062322/5697bfa11a28abf838c957c6/html5/thumbnails/11.jpg)
(3) How to assess the properties of CI?
• Trend/attractor approach
• Robalo Marques et al. (2003) 3 conditions
(1) Core and headline inflation have the same trend
– Cointegrated with unit coefficient
(2) CI is an attractor for headline inflation
– CI Granger causes headline through en ECM
![Page 12: A user point of view on core inflation measures Laurent Bilke Euro Area Macroeconomic Developments Division ECE/ILO meeting on CPI Geneve, 11 May 2006.](https://reader035.fdocuments.us/reader035/viewer/2022062322/5697bfa11a28abf838c957c6/html5/thumbnails/12.jpg)
(3) How to assess the properties of CI?
(3) Headline inflation is not an attractor for CI
– CI does not Granger causes headline through an ECM
+ through short-term dynamics (strong exogeneity)
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(3) How to assess the properties of CI?
• CI as a leading indicator
– Out of sample forecast error
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(4) An illustration
• Three monthly CI measures for the EA:
– HICPX: HICP excluding unprocessed food and energy
– Trimmed mean, 16% on each side
– Dynamic factor model, Cristadoro et al. (2004)
• Sample period rather short: 10 years
![Page 15: A user point of view on core inflation measures Laurent Bilke Euro Area Macroeconomic Developments Division ECE/ILO meeting on CPI Geneve, 11 May 2006.](https://reader035.fdocuments.us/reader035/viewer/2022062322/5697bfa11a28abf838c957c6/html5/thumbnails/15.jpg)
(4) An illustration
• Descriptive approach
![Page 16: A user point of view on core inflation measures Laurent Bilke Euro Area Macroeconomic Developments Division ECE/ILO meeting on CPI Geneve, 11 May 2006.](https://reader035.fdocuments.us/reader035/viewer/2022062322/5697bfa11a28abf838c957c6/html5/thumbnails/16.jpg)
(4) An illustration
• Attractor approach
![Page 17: A user point of view on core inflation measures Laurent Bilke Euro Area Macroeconomic Developments Division ECE/ILO meeting on CPI Geneve, 11 May 2006.](https://reader035.fdocuments.us/reader035/viewer/2022062322/5697bfa11a28abf838c957c6/html5/thumbnails/17.jpg)
(4) An illustration
• Leading indicator approach
Almost impossible to beat an autoregressive process:• Poor forecasting performance of HICPX and trimmed mean
• A bit better for DFM
In the short-term: sectoral analysis
In the long-term: broad assessment
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Conclusion
• Useful measures but mainly for descriptive purposes
• The one that has some information content on trend inflation is also very hard to communicate on
• Treatment of energy as pure noise is problematic (ECB, 2005)
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Thank you
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