measurement and analy nalysis of core inflation: the malaysian case · 2013-11-22 · measurement...
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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
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2
3
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4
5
Evaluation of measures
Interpretation of data
Inflation in Malaysia
Importance of core inflation
Concept and measure of core inflation
Second National Statistics Conference 2013 (MyStats 2013)
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
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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
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5
Second National Statistics Conference 2013 (MyStats 2013)
18 November 20133
Historical average (1991 -2012) = 2.9%
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-20
-10
0
10
20
30
40
50
Annual growth, %
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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
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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
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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
Second National Statistics Conference 2013 (MyStats 2013)
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)
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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
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– be credible
– be timely (in the computation)
– be forward looking
– be robust
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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
Second National Statistics Conference 2013 (MyStats 2013)
18 November 201355
High volatility hides important signals2
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Volatility = 12-month rolling standard deviation
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High volatility hides important signals
Second National Statistics Conference 2013 (MyStats 2013)
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.
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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’
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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.
Second National Statistics Conference 2013 (MyStats 2013)
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’
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Statistical measures of core inflation
• Most central bank rely on exclusion method, trimmed mean and weighted median
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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
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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
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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
Second National Statistics Conference 2013 (MyStats 2013)
18 November 20138
weight the disaggregated price indices to
components, which is inversely proportional
Exponential smoothing of past and current
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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
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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
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based measures of core inflation
= measure of cyclical excess demand pressure
inflation
Second National Statistics Conference 2013 (MyStats 2013)
18 November 20139
Recursive estimation for filtering and prediction
Identification of the underlying dimensions by
estimating the factors and the contribution of each
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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
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