TY  - JOUR
AU  - Cecchetti,Stephen G.
TI  - Measuring Short-Run Inflation for Central Bankers
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 5786
PY  - 1996
Y2  - October 1996
UR  - http://www.nber.org/papers/w5786
L1  - http://www.nber.org/papers/w5786.pdf
N1  - Author contact info:
Stephen G. Cecchetti
Monetary and Economic Department
Bank for International Settlements
Centralbahnplatz 2
4002 Basel
SWITZERLAND
Tel: +41 61 280 8350
Fax: +41 61 280 9113
E-Mail: stephen.cecchetti@bis.org
AB  - As central bankers intensify their focus on inflation as the primary goal of monetary policy, it becomes increasingly important to have accurate and reliable measures of changes in the aggregate price level.  Measuring inflation is surprisingly difficult, involving two types of problems.  Commonly used indices, such as the Consumer Price Index (CPI), contain both transitory noise and bias.  Noise causes short-run changes in measured inflation to inaccurately reflect movements in long-run trends, while bias leads the long-run average change in the CPI to be too high. In this paper I propose methods of reducing both the noise and the bias in the CPI.  Noise reduction is achieved by average monthly inflation in measures called  trimmed means' over longer horizons.  Trimmed means are statistics similar to the median that are calculated by ignoring the CPI components with extreme high and low changes each month, and averaging the rest.  I find that using three month averages halves the noise, while removing the highest and lowest ten percent of the cross-sectional distribution of inflation reduces the monthly variation in inflation by one-fifth.
ER  -