EcoSta 2017: Start Registration
View Submission - EcoSta2017
A0718
Title: On core inflation measures: Evidence from the European Union countries Authors:  Aleksandra Halka - Narodowy Bank Polski (Poland) [presenting]
Grzegorz Szafranski - National Bank of Poland and University of Lodz (Poland)
Abstract: The deep and long lasting decreases in consumer inflation have been observed since 2012 throughout many advanced and emerging economies. The negative headline inflation data in several economies are accompanied with core inflation recording the historical lows, which brings the questions about the sources of inflation decline as well as about the changes in the long-run level of inflation. To answer these questions we decompose the consumer inflation in several European economies into permanent (trend inflation) and transitory component extending a previous unobserved component model. In this context we investigate the role of the core inflation measures. We find that the core inflation measures that excludes the energy and food components excludes a significant part of the permanent component and for that reason is not the best approximation of the underlying inflation in particular in the period of the long-lasting commodity shocks. We evidence relatively strong correlation between core inflation and output gap. This result supports the hypothesis that the core inflation may to some extent reflect the changes in demand pressure in the economy. We also document that, the proper identification of sources of inflation variability may be also useful in predicting future inflation.