The Performance of Trimmed Mean Measures of Underlying Inflation

38 Pages Posted: 8 Dec 2006  

Anthony J. Richards

Reserve Bank of Australia - Economic Research

Andrea Brischetto

Reserve Bank of Australia

Date Written: December 2006

Abstract

This paper uses data for Australia, the United States, Japan and the euro area to examine the relative performance of the headline CPI, exclusion-based 'cores', and trimmed means as measures of underlying inflation. Overall, we find that trimmed means tend to outperform headline and exclusion measures on a range of different criteria, indicating that they can be thought of as having better signal-to-noise ratios. We also find that there is a wide range of trims that perform well. One innovation for the United States is to break up the large implicit rent component in the US CPI into four regional components, which improves the performance of trimmed means, especially large trims such as the weighted median.

The results lend support to the use of trimmed means as useful measures of underlying inflation at the current juncture where the growth of China and other emerging markets is having two offsetting effects on global inflation. Whereas some central banks have tended to focus on headline inflation and others have focused more on exclusion measures, our results provide some justification for a middle path, namely using trimmed mean measures which deal with outliers at both ends of the distribution of price changes in a symmetric manner.

Keywords: underlying inflation, core inflation, trimmed means, Australia, United States, Japan, euro area

JEL Classification: E31, E52, E58

Suggested Citation

Richards, Anthony J. and Brischetto, Andrea, The Performance of Trimmed Mean Measures of Underlying Inflation (December 2006). Available at SSRN: https://ssrn.com/abstract=950209 or http://dx.doi.org/10.2139/ssrn.950209

Anthony J. Richards (Contact Author)

Reserve Bank of Australia - Economic Research ( email )

GPO Box 3947
Sydney, NSW 2001
Australia
61 2 9551 8801 (Phone)
61 2 9551 8833 (Fax)

Andrea Brischetto

Reserve Bank of Australia ( email )

65, Martin Place
Sydney, NSW 2000
Australia

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