Monetary and Economic Studies Vol.15, No.2 / December 1997

Inflation Measures for Monetary Policy: Measuring the Underlying Inflation Trend and Its Implication for Monetary Policy Implementation

Shigenori Shiratsuka

Few will argue against the view that price stability plays an important role in promoting medium- to long-term economic growth. However, a consensus has yet to be gained as to how we should define price stability in the context of monetary policy operations and a desirable rate of inflation. In addition, measured inflation rates are affected by various temporary shocks, and it is indeed quite a difficult issue to assess whether the underlying inflation trend is stable or not. This paper reexamines the definition of price stability from the practical viewpoint of monetary policy implementation, and discusses the usefulness of a limited influence estimator (LIE) as an indicator to trace the underlying inflation trend. The LIE is deemed useful in adjusting for the effects of various temporary shocks, and in gauging the underlying trend in price changes. In particular, the strength and direction of the under-lying inflation trend become more evident when year-to-year and seasonally adjusted month-to-month changes of the LIE are used in combination with other indexes such as changes in the overall CPI (or the overall CPI excluding fresh food).

Keywords: Monetary policy; Price stability; Underlying inflation; Limited influence estimator; Skewed and fat-tailed distribution of individual price changes

Views expressed in the paper are those of the authors and do not necessarily reflect those of the Bank of Japan or Institute for Monetary and Economic Studies.

Copyright © 1997 Bank of Japan All Rights Reserved.

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