The Korean Economic Review
Disaggregated Approach to Measuring Core Inflation
Hyok Jung Kim (Sungkyunkwan University) and Young Se Kim (Sungkyunkwan University)Year 2015Vol. 31No. 1
To distinguish inflation signal from transient noise, monetary policymakers have longused core inflation measures. Using disaggregate CPI data for Korea, this paper reviewsextant measures of core inflation and documents several important empirical features of themeasures. Our theoretical analysis demonstrates that the stylized facts on the extant measuresare not compatible with a single stochastic trend, and our empirical findings stronglysupport this view. Motivated by price divergence, we model disaggregate prices in multiplecomponentstructure and find there are four persistent components together with a group ofdiverging items. Having identified distinct common components, we employ a new coreinflation measure based on a limited influence estimator for each convergence club. Thenew core inflation dominates the extant measures in its ability to account for centraltendency of price distribution and for generating low variance of price changes. In addition,it forecasts the underlying trend of headline CPI inflation more accurately than the extantcore inflation indicators do.