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Evaluating Core Inflation Indicators

Authors 
Luís Morais Sarmento
Pedro Duarte Neves
Publication Year 
2000
JEL Code 
C43 - Index Numbers and Aggregation
E31 - Price Level; Inflation; Deflation
E52 - Monetary Policy (Targets, Instruments, and Effects)
Abstract 
This paper proposes testable conditions that core inflation measures should satisfy. Trend inflation indicators calculated by Banco de Portugal are tested against this background. The major conclusion is that the so-called “underlying inflation”, the “10% trimmed mean”, and the “25% trimmed mean” do not meet the proposed conditions. However, they are satisfied by the “37-month centred moving average”, the “first principal component” and the “standard deviation weighted CPI” indicators. Yet, only the last two indicators can be used as useful core inflation measures, as the first one is not computable in real time.
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