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Existing measures of core inflation ignore a part of ‘should be’ the core inflation. Exclusion based measures ‘exclude’ a part of persistent inflation inherently existing in the excluded part whereas filter based measures ‘filter-out’ the cyclical part also rather than the irregular component only. This study proposes a new idea to define and measu...
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Context 1
... apply Granger non-causality test for headline and denoised inflation pair and test for strong exogeneity condition. We can see from Table 6 (in the appendix III) that denoised inflation causes the headline inflation while headline inflation does not cause denoised inflation and that the denoised measure of core inflation satisfies the strong exogeneity condition. ...Citations
China’s constantly rapid economic growth accompanying by a low overall inflation has long been mysterious in macroeconomics. The core purpose of this paper is to solve this puzzle. Therefore, we integrate overdetermined set of equations into a MUCSVO model to explore the volatility mechanism of the overall inflation from a sectoral perspective. Our key findings include: 1) the hedging effect of sectoral inflation fluctuations principally accounts for China’s long-run stable overall inflation; 2) the main contradiction of China’s inflation has been shifting from high price levels in the traditional food and residence categories to rising prices in the health care category; 3) as the proportions of inflation in the food and residence categories fall steadily, sectoral inflation weights become more evenly distributed. In conclusion, China’s overall inflation and deflation will be much less likely to occur, while inflation is still of sectoral imbalance. Unusual price fluctuations in the food and health care categories, which are highly relevant to basic living standards of the low-income group, deserve close attention in particular. Overall, besides solving the puzzle of China’s low inflation, our model is applicable to economies that do not publish inflation weights, which is a useful extension of core inflation measurement.
