Constructing U.K. Core Inflation

Publisher： MDPI

E-ISSN： 2225-1146|1|1|32-52

ISSN： 2225-1146

Source： Econometrics, Vol.1, Iss.1, 2013-04, pp. : 32-52

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Abstract

The recent volatile behaviour of U.K. inflation has been officially attributed to a sequence of “unusual” price changes, prompting renewed interest in the construction of measures of “core inflation”, from which such unusual price changes may be down-weighted or even excluded. This paper proposes a new approach to constructing core inflation based on detailed analysis of the temporal stochastic structure of the individual prices underlying a particular index. This approach is illustrated using the section structure of the U.K. retail price index (RPI), providing a number of measures of core inflation that can be automatically calculated and updated to provide both a current assessment and forecasts of the underlying inflation rate in the U.K.