The Stochastic Structure of a Price Index and Inflation

Abstract

In this paper, we examine the stochastic structure of a consumer price index and its inflation that ultimately provides the basis for monetary policy and other contracting fulfillments. The index is the broad monthly consumer price index, IPC-A of the Brazilian Institute of Geography and Statistics (IBGE) in the period January 2001 to February 2011. We find that, at the low frequency, aggregate factors contribute significantly to price level dispersion in the long run; but not to the mean price level. The effects differ conditional on the weights attached to each component of the index. At the high frequency, using instrumental variables, we find that inflation dispersion is strictly increasing and strictly convex on average inflation. We propose one index filtering procedure and show that each aggregate variable has a positive high frequency effect on the actual average inflation.