Comparing “Exclusion” to “Neutralization” in Computing Core Inflation and Testing Cointegration of Core with Headline Inflation: Results for the Philippines
Core inflation removes volatile prices from headline inflation. One way for removal is “exclusion” of pre-selected items (e.g., food and energy) by setting their weights to zero, which is practiced in the Philippines and the United States, among other countries. Using Philippine Statistics Authority...
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| Main Authors: | , |
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| Format: | text |
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Animo Repository
2024
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| Subjects: | |
| Online Access: | https://animorepository.dlsu.edu.ph/ber/vol34/iss1/13 |
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| Institution: | De La Salle University |
| Summary: | Core inflation removes volatile prices from headline inflation. One way for removal is “exclusion” of pre-selected items (e.g., food and energy) by setting their weights to zero, which is practiced in the Philippines and the United States, among other countries. Using Philippine Statistics Authority CPI data (January 2012–July 2021), this paper shows that core inflation by exclusion is illogical because it could be higher than headline inflation when the excluded items have positive inflations. To avoid this illogical result, this paper proposes “neutralization” by keeping the excluded items but making their CPIs constant, thus neutralizing them because they cannot contribute to inflation. This yields the logical result that core inflation is lower (higher) than the headline if the neutralized items have positive (negative) inflations. Moreover, headline inflation is not cointegrated with core inflation by exclusion but is cointegrated with core inflation by neutralization when the neutralized items have inflation contributions that are not significantly different from zero. Therefore, neutralization should replace exclusion because this finding implies headline inflation will diverge from core inflation by exclusion but not from core inflation by neutralization, a scenario with important implications for monetary policy in the Philippines and other countries that practice exclusion. |
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