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© 2023 International Monetary Fund
WP/23/44
IMF Working Paper
African Department
Weighted Median Inflation Around the World:
A Measure of Core Inflation
Prepared by Laurence Ball, Carlos Carvalho, Christopher Evans and Luca Antonio Ricci*
Authorized for distribution by Luca Antonio Ricci
February 2023
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
ABSTRACT: The standard measure of core or underlying inflation is the inflation rate excluding food and energy prices. This paper constructs an alternative measure, the weighted median inflation rate, for 38 advanced and emerging economies using subclass level disaggretion of the CPI over 1990-2021, and compares the properties of this measure to those of standard core. For quarterly data, we find that the weighted median is less volatile than standard core, more closely related to economic slack, and more closely related to headline inflation over the next year. The weighted median also has a drawback: in most countries, it has a lower average level than headline inflation. We therefore also consider a measure of core inflation that eliminates this bias, which is based on the percentile of sectoral inflation rates that matches the sample average of headline CPI inflation.
RECOMMENDED CITATION: Ball, Laurence, Carlos Carvalho, Christopher Evans and Luca Antonio Ricci, 2023, “Weighted Median Inflation Around the World: A Measure of Core Inflation”, IMF, Working Paper WP/23/44
| JEL Classification Numbers: | C43, E31, E52 |
| Keywords: | core inflation; median inflation; Phillips curve. |
| Author’s E-Mail Address: | lball@jhu.edu, cvianac@econ.puc-rio.br, cevans@imf.org, lricci@imf.org |
| JEL Classification Numbers: | C43, E31, E52 |
| Keywords: | core inflation; median inflation; Phillips curve. |
| Author’s E-Mail Address: | lball@jhu.edu, cvianac@econ.puc-rio.br, cevans@imf.org, lricci@imf.org |
Contents
I. Introduction
II. Data and Methodology
III. Results
A. Volatility
B. Average Inflation
C. Phillips Curve Estimation
D. P*, An Unbiased Core Measure
E. P*: Results for Volatility and Bias
F. P*: Results for Phillips Curves
G. Median and P*: Capturing One-Year-Ahead Headline Inflation
H. 2021-22 Inflation Event
IV. Conclusions
References
Appendixes
A. Monthly Results
A.1 Results on Volatility
A.2 Results on Mean
A.4 Results on Volatility with P*
A.5 Results on Bias to Headline with P*
A.6 Results on Capturing One-Year-Ahead Headline Inflation with P*
B. Additional Quarterly Results
C. Investigating the bias
D. Panel Phillips Curve Regression Tables
FIGURES
Figure 1. Quarterly, Volatility
Figure 2. Quarterly, Mean
Figure 3. Quarterly, Bias to Headline
Figure 4. Phillips Curve, Baseline Specification, R2
Figure 5. Phillips Curve, Baseline Specification, R2, Showing Only Cases with Positive and Significant Coefficients on Output
Figure 6. Panel Phillips Curve, R2
Figure 7. Percentile Associated with P*
Figure 8. Quarterly with P*, Volatility
Figure 9. Quarterly with P*, Bias to Headline
Figure 10. Phillips Curve, Baseline Specification with P*, R2
Figure 11. Panel Phillips Curve with P*, R2
Figure 12. Quarterly, RMSE of Core Measures / RMSE of Headline Inflation
Figure 13. 12-Month, Selected Country Percentiles
Figure 14. Monthly, Volatility
Figure 15. Monthly, Volatility of Difference in Inflation
Figure 16. Monthly, Mean
Figure 17. Monthly, Bias to Headline
Figure 18. Monthly with P*, Volatility
Figure 19. Monthly with P*, Bias to Headline
Figure 20. Monthly, RMSE of Core Measures / RMSE of Headline Inflation
Figure 21. Quarterly, Volatility of Difference in Inflation
Figure 22. Quarterly, Bias versus Mean
Figure 23. Phillips Curve, Hybrid Specification, R2
Figure 24. Phillips Curve, Hybrid Specification, R2 Showing Only Results That Include Significant Coefficients
Figure 25. Quarterly with P*, Volatility of Difference Inflation
Figure 26. Phillips Curve, Hybrid Specification with P*, R2
Figure 27. 12-Month, Random Walk, RMSE Core Measures / RMSE of Headline Inflation
Figure 28. Monthly and Quarterly, Bias Versus Share of Zeros
Figure 29. Phillips Curve, Baseline Specification, Difference in R2 with Headline
Figure 30. Phillips Curve, Baseline Specification, R2 and Coefficient on the Output Gap
TABLES
Table 1 Country Sample
Table 2 Phillips Curve, Baseline Specification, R2
Table 3 Phillips Curve, Baseline Specification, Coefficient on the Output Gap
The authors would like to thank Pedro Henrique da Silva Castro and Ivan Burgara for invaluable discussions and support as well as participants at various IMF seminars for their helpful feedback. The views expressed here are those of the authors and do not necessarily represent those of the IMF, its Management and Executive Board, or IMF policy.