A new core inflation indicator for New Zealand

Release date
01/12/2006
Reference
DP2006/10
Authors
Troy Matheson; Domenico Giannone
Published as
Giannone, Domenico and Troy Matheson (2007). 'A new core inflation indicator for New Zealand', International Journal of Central Banking, Vol. 3(4), Pages 145-180.
This paper introduces a new indicator of core inflation for New Zealand, estimated using a dynamic factor model and disaggregate price data. Using disaggregate price data we can directly compare the predictive performance of our core indicator with a wide range of other ‘core inflation’ measures estimated from disaggregate prices, such as the weighted median and the trimmed mean. Predictive performance is assessed relative to a centred 2 year moving average of past and future annual inflation outcomes. The 2 year centred moving average is used as an analytical approximation of the inflation target from the PTA, which requires the Reserve Bank to keep annual inflation between 1 and 3 per cent on average over the medium term. We find that our indicator produces relatively good estimates of this characterisation of core inflation when compared with estimates derived from a range of other models.