Measuring Core Inflation

Under the Policy Targets Agreement, the Reserve Bank is required to keep future CPI inflation outcomes between 1 percent and 3 percent on average over the medium term. The headline CPI inflation rate provides some information on the strength of current and future inflation pressures, but can often be clouded by temporary fluctuations. Core inflation measures attempt to abstract from these temporary fluctuations to better inform us of the underlying trends in inflation. This article outlines a number of criteria that can be used to assess the relative merits of possible measures of core inflation. It then analyses a range of alternative core inflation measures against these criteria and draws some conclusions as to which measures might best serve as core inflation indicators in New Zealand.