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N this paper the long-run trend in CPI inflation (core inflation) for Italy is estimated over the 1962-1997 period. The estimates obtained with the Quah and Vahey (1995) bivariate structural VAR methodology and with a multivariate common trends model are compared. The results show the potential advantages for monetary policy of using a more informative common trends model to estimate the core inflation process.
Italian inflation has risen to 9.4% in September 2022. Energy goods have been the primary driver of the inflation surge since the fall of 2021, but price increases are now spreading to the whole economy, with 'core' inflation at 5.3%. Since Italy's industries heavily rely on gas as an energy source, many energy-intensive sectors experienced greater producer price increases. The gap between nominal wages and inflation have started to widen; in the first nine months of 2022 real wages lost 6.6 percentage points. Inflationary pressures affect Italian households unevenly; price increases have a much higher impact on the poorest groups of the population, due to their large share of expenditures on energy and food. From the end of 2021 to November 2022, the Italian government spent 62.8 billion euros on measures compensating firms and households for the surge in prices caused by inflation. The resources amount to 0,3% of the Italian GDP in 2021 and 3% in 2022. These measures benefited households to the tune of 16.9 billion euros, firms 23.5 billion, while 22.4 billion went to supporting the overall economy. Mario Draghi's government measures mainly focused on tax credits, social and energy bonuses, along with reductions in excise taxes and VAT on electricity and gas. The right-wing government led by Giorgia Meloni elected in September 2022 has generally extended previous measures.
Intuitively core inflation is understood as a measure of inflation where noisy price movements are avoided. This is typically achieved by either excluding or downplaying the importance of the most volatile items. However, some of those items show high persistence, and one certainly does not want to disregard persistent price changes. The non-equivalence between volatility and (the lack of) persistence implies that when one excludes volatile items relevant information is likely to be discarded. Therefore, we propose a new type of core inflation measure, one that takes simultaneously into account both volatility and persistence. The evidence shows that such measures far outperform those based on either volatility or persistence. The latter have been advocated in the literature in recent years.
Many alternative measures of core, or underlying, inflation have been proposed that are based on stripping out some unwanted or excessively volatile elements from the headline rate. A potential drawback of such measures is that they are necessarily atheoretic--based largely on purely statistical procedures. This paper proposes an alternative method of measuring core inflation utilizing an explicit economic definition. It defines core inflation as that part of measured inflation that has no medium or long term impact on real output--a notion that is consistent with the vertical long-run Phillips curve. This definition captures the commonly held view that moderate movements in inflation can have no impact on the real economy once financial and wage contracts have been written taking it into account. Using this definition the paper estimates a measure of core inflation using the VAR identification technique developed by Blanchard and Quah. The estimated measure indicates that core inflation was higher than measured inflation in the early 80s suggesting that measured inflation was depressed by beneficial supply shocks. The opposite effect occurred in the late 80s. Currently, core inflation is above measured inflation.
The measurement of core inflation can be carried out by optimal signal extraction techniques based on the multivariate local level model, by imposing suitable restrictions on its parameters. The various restrictions correspond to several specialisations of the model: the core inflation measure becomes the optimal estimate of the common trend in a multivariate time series of inflation rates for a variety of goods and services, or it becomes a minimum variance linear combination of the inflation rates, or it represents the component generated by the common disturbances in a dynamic error component formulation of the multivariate local level model. Particular attention is given to the characterisation of the optimal weighting functions and to the design of signal extraction filters that can be viewed as two sided exponentially weighted moving averages applied to a cross-sectional average of individual inflation rates. An empirical application relative to U.S. monthly inflation rates for 8 expenditure categories is proposed.
Inflation is regarded by the many as a menace that damages business and can only make life worse for households. Keeping it low depends critically on ensuring that firms and workers expect it to be low. So expectations of inflation are a key influence on national economic welfare. This collection pulls together a galaxy of world experts (including Roy Batchelor, Richard Curtin and Staffan Linden) on inflation expectations to debate different aspects of the issues involved. The main focus of the volume is on likely inflation developments. A number of factors have led practitioners and academic observers of monetary policy to place increasing emphasis recently on inflation expectations. One is the spread of inflation targeting, invented in New Zealand over 15 years ago, but now encompassing many important economies including Brazil, Canada, Israel and Great Britain. Even more significantly, the European Central Bank, the Bank of Japan and the United States Federal Bank are the leading members of another group of monetary institutions all considering or implementing moves in the same direction. A second is the large reduction in actual inflation that has been observed in most countries over the past decade or so. These considerations underscore the critical – and largely underrecognized - importance of inflation expectations. They emphasize the importance of the issues, and the great need for a volume that offers a clear, systematic treatment of them. This book, under the steely editorship of Peter Sinclair, should prove very important for policy makers and monetary economists alike.
This is the first comprehensive study in the context of EMDEs that covers, in one consistent framework, the evolution and global and domestic drivers of inflation, the role of expectations, exchange rate pass-through and policy implications. In addition, the report analyzes inflation and monetary policy related challenges in LICs. The report documents three major findings: In First, EMDE disinflation over the past four decades was to a significant degree a result of favorable external developments, pointing to the risk of rising EMDE inflation if global inflation were to increase. In particular, the decline in EMDE inflation has been supported by broad-based global disinflation amid rapid international trade and financial integration and the disruption caused by the global financial crisis. While domestic factors continue to be the main drivers of short-term movements in EMDE inflation, the role of global factors has risen by one-half between the 1970s and the 2000s. On average, global shocks, especially oil price swings and global demand shocks have accounted for more than one-quarter of domestic inflation variatio--and more in countries with stronger global linkages and greater reliance on commodity imports. In LICs, global food and energy price shocks accounted for another 12 percent of core inflation variatio--half more than in advanced economies and one-fifth more than in non-LIC EMDEs. Second, inflation expectations continue to be less well-anchored in EMDEs than in advanced economies, although a move to inflation targeting and better fiscal frameworks has helped strengthen monetary policy credibility. Lower monetary policy credibility and exchange rate flexibility have also been associated with higher pass-through of exchange rate shocks into domestic inflation in the event of global shocks, which have accounted for half of EMDE exchange rate variation. Third, in part because of poorly anchored inflation expectations, the transmission of global commodity price shocks to domestic LIC inflation (combined with unintended consequences of other government policies) can have material implications for poverty: the global food price spikes in 2010-11 tipped roughly 8 million people into poverty.
The ability of central banks to differentiate between permanent & transitory price movements is critical for the conduct of monetary policy. The importance of gauging the persistence of price changes has led to the development of measures of underlying, or ¿core,¿ inflation that are designed to remove transitory price changes from aggregate inflation data. This article examines several proposed measures of core inflation -- the ex food & energy series, an ex energy series, a weighted median series, & an exponentially smoothed series -- to identify a ¿best¿ measure. Evaluates the measures¿ performance according to criteria such as ease of design, & accuracy in tracking trend inflation. Charts & tables.