measurement and analy nalysis of core inflation: the malaysian case · 2013-11-22 · measurement...

Measurement and analy

The Malaysian case

1

Mohd Helmi RamleeMonetary Assessment And Strategy Department

Bank Negara Malaysia (BNM)

DISCLAIMER: The views expressed in this presentation are those of the presenter and do not necessarily represent those of BNM

nalysis of core inflation:

The Malaysian case

Second National Statistics Conference 2013 (MyStats 2013)

18 November 20131

Mohd Helmi RamleeMonetary Assessment And Strategy Department

Bank Negara Malaysia (BNM)

DISCLAIMER: The views expressed in this presentation are those of the presenter and do not necessarily represent those of BNM.

Session Objectives

Inflation in Malaysia

Importance of core inflation

Concept and measure of core inflation

1

2

3

22

4

5

Evaluation of measures

Interpretation of data

Inflation in Malaysia

Importance of core inflation

Concept and measure of core inflation


18 November 201322

Evaluation of measures

Interpretation of data

Inflation in Malaysia have been driven mainly by

supply factors

Higher food prices following

adverse weather conditions and

labour shortage and upward

adjustment to petrol prices

Higher global commodity

prices following Iran

Revolution

1

2

3

1

33

Inflation in Malaysia have been driven mainly by

Depreciation in exchange

rates, domestic supply

issues and adjustment to

electricity tariff

Adjustment to petrol

price and electricity

tariff

Adjustment to petrol

price and electricity

tariff

4

5


18 November 20133

Historical average (1991 -2012) = 2.9%

3

-20

-10

0

10

20

30

40

50

Annual growth, %

12

In the past, adjustment to petrol prices led to higher

headline inflation• However, the absence of subsidy in the near future might change the inflation dynamics

1

4

-40

-30

-20

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

Petrol pump price (LHS) Headline inflation (RHS)

Historical change in petrol price

• October 2001: +10 sen

• May 2005 and July 2005: +10 sen, March 2006: +30 sen

• June 2008: +78 sen

• August – Dec 2008 (cumulative): -90 sen

• July 2010 and December 2010: +5 sen

1

2

3

4

5

4

-4

-2

0

2

4

6

8

10

Annual growth, %

3

4

5

In the past, adjustment to petrol prices led to higher

However, the absence of subsidy in the near future might change the inflation dynamics


18 November 20134

-8

-6

-4

20

07

20

08

20

09

20

10

20

11

20

12

20

13

Headline inflation (RHS) Core inflation (RHS)

4

4

Why Should We Look at Core Inflation?

• A good measure of inflation for policy formulation

– Research on the relationship between monetary policy, economic activity and

inflation requires accurate measurement of underlying inflation.

– Policymakers should be able to distinguish between noises and signals

obtained from inflation.

• One must bear in mind that, core inflation measure must

2

5

– be credible

– be timely (in the computation)

– be forward looking

– be robust

5

Why Should We Look at Core Inflation?

A good measure of inflation for policy formulation

Research on the relationship between monetary policy, economic activity and

inflation requires accurate measurement of underlying inflation.

Policymakers should be able to distinguish between noises and signals

One must bear in mind that, core inflation measure must


18 November 201355

High volatility hides important signals2

6

Volatility = 12-month rolling standard deviation

6

High volatility hides important signals


18 November 201366

Various Definition of Core Inflation

• 3 important elements of core inflation: persistence, demand pressures & expectations.

Source

Friedman (1963)

‘…[inflation as a] steady and sustained increase in the general price level’. [He emphasizes the

distinction]…between a steady inflation, one that proceeds at a more or less constant rate, and an

intermittent inflation, one that proceeds by fits and starts…’

Otto Eckstein

(1981)

‘…is a trend increase of the cost of the factors of production. It originates in the long

inflation in the minds of households and businesses, in the contractual arrangements which sustain the

wage-price momentum, and in the tax system.

3

7

Bryan & Cecchetti

(1993)

‘…when people use the term [core inflation] they seem to have in mind the long

component of measured price index, which is in some way tied to money growth…’

Rogers (1995)

‘…the appropriate measure of underlying inflation for policy purposes, therefore, is one which is able to

distinguish between one-off shocks to price arising from supply

the ongoing inflation rate arising from demand

Quah and Vahey

(1995)

‘…as that component of measured inflation that has no medium to long

definition captures the commonly held view that (moderate) movements in inflation can be benign for the

real economy once financial and wage contracts have been written taking it into account’

7

Various Definition of Core Inflation

3 important elements of core inflation: persistence, demand pressures & expectations.

Remarks

‘…[inflation as a] steady and sustained increase in the general price level’. [He emphasizes the

distinction]…between a steady inflation, one that proceeds at a more or less constant rate, and an

intermittent inflation, one that proceeds by fits and starts…’

‘…is a trend increase of the cost of the factors of production. It originates in the long-term expectations of

inflation in the minds of households and businesses, in the contractual arrangements which sustain the

price momentum, and in the tax system.


18 November 20137

‘…when people use the term [core inflation] they seem to have in mind the long-run, or persistent

component of measured price index, which is in some way tied to money growth…’

‘…the appropriate measure of underlying inflation for policy purposes, therefore, is one which is able to

off shocks to price arising from supply-side developments as opposed to shocks to

the ongoing inflation rate arising from demand-side development’

‘…as that component of measured inflation that has no medium to long-run impact on real output. This

definition captures the commonly held view that (moderate) movements in inflation can be benign for the

real economy once financial and wage contracts have been written taking it into account’

7

Statistical measures of core inflation

• Most central bank rely on exclusion method, trimmed mean and weighted median

3

Method Description

Exclusion

method

Derived by permanently excluding certain

components from the price index, a priori

Trimmed mean Calculated by excluding a certain percentage

of the largest and smallest (weighted) price

changes in components of the index

8

Weighted

median

Re-weight the disaggregated price indices to

maximise the ‘signal’ in the data

Double

weighted

Assigning a new weight to all CPI

components, which is inversely proportional

to its volatility

Exponential

smoothing

Exponential smoothing of past and current

aggregate price changes

8

Statistical measures of core inflation

Most central bank rely on exclusion method, trimmed mean and weighted median

Derived by permanently excluding certain

components from the price index, a priori

Calculated by excluding a certain percentage

of the largest and smallest (weighted) price


18 November 20138

weight the disaggregated price indices to

components, which is inversely proportional

Exponential smoothing of past and current

8

Model-based measures of core inflation3

Method Description

Structural VAR Inflation is define as:

= aggregate inflation rate in period t

= long-run or trend inflation rate

= measure of cyclical excess demand pressure

= measure of temporary disturbances to inflation

ttXg

LR

tυππ +

−+= )

1(

LRπ)

1(

−tXg

tπ

tυ

9

Core inflation

Kalman filter Recursive estimation for filtering and prediction

Principal

component

analysis

Identification of the underlying dimensions by

estimating the factors and the contribution of each

variable to the factors

t

)1(][ −+=−= tXgLRttt

ct πυππ

9

based measures of core inflation

= measure of cyclical excess demand pressure

inflation


18 November 20139

Recursive estimation for filtering and prediction

Identification of the underlying dimensions by

estimating the factors and the contribution of each

9

Hybrid-based measures of core inflation3

Method Description

Domestically

Generated

Inflation (DGI)

Measure core inflation that would prevail absent of

external shocks to the economy

π = Headline Inflation,

(yt-i – ypt-i) = Output Gap,

e = NEER (Nominal Effective Exchange Rates),

s = Spot Exchange Rates (RM/USD),

pw = World Inflation,

wgk

itits

w

itite

p

ity

ity

p

ity

ity

ttβπβπβββππ +

−+

−+

−+

−−

−∆−

−∆+

−−

−+

−= (

5)(

4)(

3)(

2)(

11&

10

ERROR: undefined

OFFENDING COMMAND: ‘~

STACK:

measurement and analy nalysis of core inflation: the malaysian case · 2013-11-22 · measurement...

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