Core Inflation Research Articles

Monetary Policy in an Oil-Exporting Emerging Economy with Fuel Subsidies

This paper develops a DSGE model for an emerging oil-exporting economy with a fuel subsidy regime to analyse the stabilising role of alternative monetary policy rules under different subsidy arrangements. The model is estimated via Bayesian methods using data for Nigeria from 2000Q2 to 2019Q4. This paper (i) estimates a domestic fuel pricing rule for an oil-exporting emerging economy of Nigeria with fuel subsidies, (ii) characterizes monetary policy behaviour under such an estimated fuel pricing rule, and (iii) evaluates the appropriateness of alternative monetary policy rules under different assumptions regarding the fuel subsidy regime. The results show that approximately 45 per cent of changes to the global oil price are transmitted to the retail price of fuel. Also, it was found that the behaviour of monetary policy in Nigeria has been characterised by the headline inflation monetary rule. However, the monetary authority is able to reduce policy loss by approximately 11 per cent if it targets core inflation rather than a measure of inflation that includes energy prices. Under a zero-subsidy regime, the core inflation monetary rule outperforms its competitors in achieving overall macroeconomic stability, provided the share of oil in total consumption is relatively low.

External vulnerability and optimal monetary policy in Nigeria

In this study, we assess the external vulnerability of the Nigerian economy by documenting three alternatives (zero, partial and full) oil price pass-through to inflation within a New Keynesian Dynamic Stochastic General Equilibrium (DSGE) framework. The results show that under a zero-oil price pass-through, the choice of inflation measure is immaterial, as macroeconomic responses to the shock are comparable under alternative Taylor rule specifications. The shock precipitates stagflation, transmitted via the income and exchange rate channels; and introduces an extra layer of vulnerability associated with higher external risk premium. Both core and oil inflation targeting monetary rules maximize welfare under a zero-oil price passthrough, while oil inflation targeting is shown to be welfare superior under partial or full oil price pass-through. Credibility consideration renders core inflation targeting the feasible optimal path for the central bank.

Core Inflation Rate for China and the ASEAN-10 Countries: Smoothed Signal for Score-Driven Local Level Plus Scale Models

Abstract We use a score-driven minimum mean-squared error (MSE) signal extraction method and perform inflation smoothing for China and the ASEAN-10 countries. Our focus on China and ASEAN-10 countries is motivated by the significant historical variation in inflation rates, e.g. during the 1997 Asian Financial Crisis, the 2007–2008 Financial Crisis, the COVID-19 Pandemic, and the Russian Invasion of Ukraine. Some advantages of the score-driven signal extraction method are that it uses dynamic mean and volatility filters, it considers stationary or non-stationary mean dynamics, it is computationally fast, it is robust to extreme observations, it uses information-theoretically optimal updating mechanisms for both mean and volatility, it uses closed-form formulas for smoothed signals, and parameters are estimated by using the maximum likelihood (ML) method for which the asymptotic properties of estimates are known. In the empirical application, we present the political and economic conditions for each country and analyze the evolution and determinants of the core inflation rate.

Mechanism of regime changes of global inflation in 2012–2023

The paper studies the process of regime changes: from low inflation and interest rates in 2012–2019 to high inflation and even stagflation in 2020–2023. The authors selected eleven countries for analysis: BRICS, USA and Great Britain, and four EU leading states— Germany, France, Spain and Italy. The trends examined in the first period reflect the difficulty in determining (on monthly data) the role of classic factors influencing the inflation processes (by CPIs) — monetary policy and unemployment, with energy and food prices having strong influence in this period. In general, the upturn in 2012–2019 was not too strong and created a rather comfortable (and predictable) environment for low inflation. In the period of shock recession after the COVID lockdowns the speed of consumer inflation in six developed countries had tripled. General inflation was affected by energy and food process and formatted so rapidly that such factors as unemployment and money supply growth turned out irrelevant. Having reached high growth rate, inflation moved wages up and fixed both its rate (one side elasticity) and dynamics. Core inflation index (manufactured goods) grew in parallel with unit labor cost, which entailed cost-push inflation effect. Growing interest rates were designed to slow down inflation by squeezing economic activity, which was not that simple in terms of ULC in the short run.

Demystifying COVID-19 policy actions: The case of inflation control in ASEAN

In this paper, we study the impact of policy actions undertaken by governments and other policy authorities during the COVID-19 pandemic on core inflation in four major economies of ASEAN region namely Indonesia, Malaysia, Singapore, and Thailand. Utilizing panel fixed effects regression, we find that policy interventions where financial authority and the central governments were the implementing institutions as significantly impacting the inflation. Further, delving into specific policy tools, our study finds evidence of significant impact of regulatory announcement and rules and miscellaneous prudential rules on core inflation. Our investigation is preliminary, but it provides insights into additional understanding of the effectiveness of policy actions in controlling inflation.

The effect of inflation on CO2 emissions: An analysis over the period 1970–2020

Does inflation affect CO2 emissions? Surprisingly, this crucial relationship has not benefited from enough academic attention. As a result, we fill this knowledge gap and examine conceptually and empirically the effect of inflation on CO2 emissions over a large sample of countries (N = 189) and a 50-year period (1970–2020). More precisely, we run fixed effects regressions and panel cointegration tests. We find a modest, but significant negative relationship between core inflation and CO2 emissions per capita. The effect is also present for total CO2 emissions. Nevertheless, this effect is too weak to reach recommended CO2 emission reductions. Ceteris paribus, a 10-percentage points increase of core inflation over a 5-year span leads, on average, to a reduction of CO2 emissions per capita by roughly 0.36. This implies that other policies are needed.

An Alternative Measure of Core Inflation: The Trimmed Persistence PCE Price Index

An Alternative Measure of Core Inflation: The Trimmed Persistence PCE Price Index

Euro area inflation and a new measure of core inflation

This paper introduces a new decomposition of euro area headline inflation into core, cyclical, and residual components. Our new core inflation measure, the structural core inflation rate, is the expected headline inflation, conditional to medium to long-term demand and supply-side developments. It shows smoothness and trending properties, economic content, and forecasting ability for headline inflation and other available core inflation measures routinely used at the ECB for internal or external communication. Hence, it carries additional helpful information for policy-making decisions. Concerning recent developments, all the inflation components contributed to its post-pandemic upsurge. Since mid-2021, core inflation has been downward, landing at about 3% in 2022. Cyclical and residual inflation-associated with idiosyncratic supply chains, energy markets, and geopolitical tensions- are currently the major threats to price stability. While some cyclical stabilization is ongoing, a stagflation scenario cum weakening overall financial conditions might emerge. A pressing issue for ECB monetary policy will be to face -mostly supply-side- inflationary pressure without triggering a financial crisis.

Do commodity factors work as inflation hedges and safe havens?

This study investigates whether commodity futures factor portfolios work as hedges and safe havens against inflation shocks. We observe that momentum, basis momentum, and a combination of factor portfolios act as strong hedges against core inflation shocks, suggesting that holding the factor portfolios generates not only higher Sharpe ratios but also strong hedge effects against inflation. Moreover, the momentum, basis momentum, and value portfolios have weak safe haven properties against inflation shocks. In addition, our empirical results suggest that hedge effects for commodity future portfolios are stronger during the pre-financialization period.

An inquiry concerning Japanese yen swap yields

This paper econometrically models Japanese yen (JPY)–denominated interest rate swap yields. It examines whether the short-term interest rate exerts an influence on the long-term JPY swap yield after controlling for several key macroeconomic variables, such as core inflation, the growth of industrial production, the percentage change in the equity price index, and the percentage change in the exchange rate. It also tests whether there are structural breaks in the dynamics of Japanese swap yields and related variables. The estimated econometric models show that the short-term interest rate exerts an important influence on the long-term swap yield in some periods but not in other periods in which core inflation exerts a marked influence on the swap yield. The findings from the econometric models reveal that a discernible relationship between the call rate and the swap yield of different maturity tenors clearly held prior to April 2014 but did not in the subsequent period. These findings highlight the limits and scope of John Maynard Keynes’s contention that the central bank’s policy rate commands a decisive influence over the long-term market rate through the short-term interest rate. The policy implications of the estimated models’ results are discussed.

Feature Article: How much are indirect effects of energy still lifting core inflation?

Feature Article: How much are indirect effects of energy still lifting core inflation?

An alternative measure of core inflation: the Trimmed Persistence PCE price index

An alternative measure of core inflation: the Trimmed Persistence PCE price index

Producer Prices and Core Inflation: The Case of Türkiye

Türkiye’de enflasyonist eğilimler son dönemde en önemli makro ekonomik konulardan biri olmuştur. Yüksek döviz kuru kaynaklı üretim maliyetlerindeki artışlar tüketici enflasyonunu da artırmıştır. Tüketici fiyatlarındaki temel göstergelerden biri de çekirdek enflasyondur. Çekirdek enflasyonun düşürülmesi uygulanan para politikasından başarılı bir sonuç alındığını göstermektedir. Bu çalışmanın amacı üretici fiyatlarının uzun dönemde çekirdek enflasyon üzerinde ne derece belirleyici olduğunu araştırmak ve arz yönlü şokların temel fiyat göstergesi üzerindeki kalıcılığını ortaya çıkarmaktır. Bu kapsamda üretici fiyatlarını gösteren Üretici Fiyat Endeksi ile Merkez Bankası tarafından dikkate alınan özel kapsamlı TÜFE göstergesi olan (B) Çekirdek Enflasyon değişkenleri arasındaki uzun dönemli ilişki ARDL yöntemi ile aylık olarak 2003-2023 dönemi için incelenmiştir. Çalışmanın bulgularına göre üretici fiyatlarının çekirdek enflasyonu uzun dönemde kalıcı olarak artırdığı tespit edilmiştir. Ayrıca çekirdek enflasyon üretici fiyatları kaynaklı şoklara kalıcı ve pozitif yönde tepkiler vermektedir.

Wage-Price Spirals

ABSTRACT: We interpret recent inflation experience through the lens of a New Keynesian model with price and wage rigidities and nonlabor inputs in inelastic supply. The model provides a natural interpretation of some features of the recent episode: an initial surge of noncore inflation, followed by a lagged response of core inflation and a further lagged, persistent response of wage inflation. The model also provides a natural way of discussing the role and the strength of wage-price spiral dynamics in price-setting models. The model interprets recent developments as symptoms of underlying supply constraints, which can be triggered by both demand and supply shocks. The immediate manifestation of these constraints is in the relative price of scarce, inelastic nonlabor inputs (including energy). The secondary effects arise because they produce a gap between lowered real wage aspirations of firms—that try to make up for higher nonlabor costs—and increased real wage aspirations of workers—caused by increased labor demand. The gap produces a wage-price spiral, which continues as long as the initial relative scarcity of nonlabor inputs persists, even though input prices are falling. In this view, the fact that nominal wage growth is currently exceeding price inflation can be given a benign interpretation, as a sign of real wages going back to trend and not necessarily as a concern of an ongoing spiral.

RETRACTED: Geopolitical oil price uncertainty transmission into core inflation: Evidence from two of the biggest global players

This research argues that inflation indirectly correlates with geopolitics through the oil markets. The argument is that uncertainties generated by geopolitics are often transmitted into core inflation through oil prices, and we provide empirical evidence to support this by establishing an uncertainty-oil-macroeconomy nexus for the biggest oil importing countries, the U.S. and China. The study specifically examines whether there are indirect contributions of geopolitical oil price uncertainty to inflation that appear in core inflation, excluding the more volatile food and energy prices. It employs a non-parametric quantile causality technique for analyzing how geopolitical oil price uncertainty and core inflation interact in both countries and conducts rolling windows-based non-parametric quantile causality analysis for robustness. The full-time non-parametric quantile causality results show that geopolitical oil price risk strongly affects core inflation both in mean and variance, especially in the mid-quantiles, and that its effect is greater in variance relative to mean for both countries. The rolling windows-based outcomes indicate that geopolitical oil price risk exerts an increasing influence on core inflation during important geopolitical events such as the Euro crisis, Brexit, presidential elections, trade wars, and COVID-19, and these impacts differ not only between countries, but also according to whether causality is mean or variance. Finally, the significance of the findings is discussed.

Chinese yuan interest rate swap yields.

This paper models the dynamics of Chinese yuan-denominated long-term interest rate swap yields. It shows that the short-term interest rate exerts a decisive influence on the long-term swap yield after controlling for various macrofinancial variables, such as core inflation, the growth of industrial production, the percent change in the equity price index, and the percentage change in the Chinese yuan exchange rate. The autoregressive distributed lag approach is applied to model the dynamics of the long-term swap yield. The findings reinforce and extend John Maynard Keynes's conjecture that in advanced countries, as well as emerging market economies such as China, the central bank's actions have a decisive role in setting the long-term interest rate on government bonds and over-the-counter financial instruments, such as swaps.

Oil Price Shocks and Current Account Imbalances within a Currency Union

For over two decades, current account imbalances have been an essential issue in the global policy debate as they threaten the world economy’s stability. More recently, the government debt crisis of the European Union shows that internal current account imbalances of a currency union may also add to these risks. Moreover, oil price fluctuations and a contracting monetary policy that reacts to oil prices, previously discussed to affect the current account, may threaten the currency union by increasing internal imbalances. Therefore, this paper analyzes the oil price shock’s impact on current account imbalances of a currency union with asymmetric labor market institutions. In this context, we show that oil price shocks can have a long-lasting effect on internal balances that the common monetary olicy authority can reduce by choosing a core inflation target. Targeting core inflation, however, comes at the cost of lower production and higher unemployment. We show that these costs can be significantly reduced by increasing labor market flexibility.

Evaluating core inflation measures: A statistical inference approach

We propose a framework for consistently evaluating core inflation measures via a straightforward application of sound statistical inference principles. Under this framework, inflation measures (both headline and core) are regarded as estimators tracking the economy’s true, unobserved inflation rate. We depart from the arbitrary convention in the literature of approximating true (or trend) inflation as some moving average of the observed headline inflation. Instead, we regard trend inflation as the unobserved inflation rate that corresponds to the whole population of consumer price changes while the observed inflation measures are estimators of trend inflation based on particular samples of consumer price changes. Hence, the evaluation of inflation measures is rigorously derived from the sampling distribution properties of the corresponding estimators, in contrast to the use of ad hoc criteria for evaluating core inflation measures, prevalent both in the academic literature and in most central banks’ practices. We implement our evaluation approach for the Guatemalan Consumer Price Index (CPI) data by applying a computational bootstrapping technique. Finally, we showcase the evaluation results for the Guatemalan data regarding the performance of some widely used core inflation measures.

Gas Prices and Oil Prices under the Russia-Ukraine War Regression Analysis of Inflation

In the context of the Russia-Ukraine war, this paper analyzes the impact of the changes of oil prices and natural gas prices on the core inflation rate, inflation rate, CPI and other factors in different types of countries. This paper argues that the changes in oil and gas prices caused by the Russia-Ukraine war have a significant impact on the inflation of developed countries, while the impact on the core inflation rate and CPI is not significant.

The impact of rising EU Allowance prices on core inflation in the Eurozone

AbstractThis article examines the impact of EU Allowance (EUA) prices on core inflation in the Eurozone between 2005 and 2022. The empirical results suggest that a positive shock to the EUA price led to higher long‐run inflation expectations and core inflation. This implies that the rise in EUA prices can be passed on to consumers and enterprises, leading to an increase in production costs and consumer prices. And, while a positive shock to EUA prices may promote investment in renewable energy in the short term, the impact is not statistically significant and does not last long. The results suggest considerable potential for European policymakers to re‐examine policy mechanisms to accelerate renewable energy investment and maintain price stability in the medium term.