Evaluating Core Inflation Measures in Pakistan

The concept of core inflation is getting common and several core inflation series have been estimated in Pakistan. However, no attempt has been made to study if these estimated series of core inflation are actually serving the purpose they were designed for. The main objective of this study is to evaluate core inflation measures in Pakistan on some absolute criteria. Nine different core inflation series have been tested for the three conditions proposed by Marques et al. (2000). Results suggest that none of the series based on excluding fixed items approach (one of which is also being used by SBP) satisfy these basic conditions. In contrast, all trim-based core inflation measures are satisfying basic conditions, but systematically underestimate true core inflation. For example, the currently used 20 percent trim-basket (10 percent from each end) by SBP underestimates true core inflation by 20 basis points on average. Length: 24 pages