Testing an Interpretation of Core Inflation Measures in New Zealand

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Güneş Kamber; Benjamin Wong

The Reserve Bank of New Zealand uses a range of core inflation measures in order to assess the underlying inflationary pressures. One definition of core inflation is that it represents the level of inflation to which headline inflation converges to in the future. This definition is similar to the idea of trend inflation. We build on this definition, by specifying an econometric test to evaluate which of the Reserve Bank’s core inflation measures are a good gauge of underlying inflation pressures and possess properties similar to trend inflation. According to the test, the sectoral factor model and CPI inflation excluding food and energy are, among the Bank’s current suite of measures, most consistent against this definition. We interpret our result as suggesting either of these measures as being reasonable approximation for where one might expect the level of headline inflation to converge to at a sufficiently long horizon.