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Econometrics 2013, 1(1), 32-52; doi:10.3390/econometrics1010032
Article

Constructing U.K. Core Inflation

School of Business and Economics, Loughborough University, Leicestershire, LE11 3TU, UK.
Received: 28 February 2013 / Revised: 12 March 2013 / Accepted: 12 March 2013 / Published: 25 April 2013
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Abstract

The recent volatile behaviour of U.K. inflation has been officially attributed to a sequence of “unusual” price changes, prompting renewed interest in the construction of measures of “core inflation”, from which such unusual price changes may be down-weighted or even excluded. This paper proposes a new approach to constructing core inflation based on detailed analysis of the temporal stochastic structure of the individual prices underlying a particular index. This approach is illustrated using the section structure of the U.K. retail price index (RPI), providing a number of measures of core inflation that can be automatically calculated and updated to provide both a current assessment and forecasts of the underlying inflation rate in the U.K.
Keywords: core inflation; index numbers; signal extraction; time series modelling core inflation; index numbers; signal extraction; time series modelling
This is an open access article distributed under the Creative Commons Attribution License (CC BY 3.0).
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Mills, T.C. Constructing U.K. Core Inflation. Econometrics 2013, 1, 32-52.

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