How much to trim? A methodology for calculating core inflation, with an application for Brazil

Abstract

The concept of core inflation has been central to the discussions concerning macroeconomic policy management. In spite of this fact, no single measure of this concept has achieved consensus so far. Here, we propose the application of a statistical methodology based on trimmed means, where the amount of trim is based on a benchmark provided by a common stochastic components model, which we believe captures the essence of the core inflation concept. We apply this measure to the IPC-FIPE and IPCA-IBGE, two of the leading consumer price indexes in Brazil, and comment on the results.

Keywords

• core inflation
• trimmed means