Answer discussion question Essay Example
(Name of Lecturer)
Explain what is meant by the concept of core or underlying inflation. How does it differ from actual or headline inflation.
Core inflation which is also known as underlying inflation can be defined as trend in medium term inflation. It is a long term trend in the general price level. It is also the inflation rate that would be easily recorded by anyone if shocks that were built during the short term volatility in calculating and measuring of inflation (Tony and Tom 2010). Headline inflation does measure the general inflation within the economy while core inflation excludes inflationary indicators of major food items. Headline inflation take into consideration services while core inflation does not consider inflation from service sector (Tony and Tom 2010),
(ii) Briefly explain two ways methods for estimating underlying inflation. What properties would a good measure of underlying inflation possess?
There are two methods for estimating underlying inflation, they include;
Theoretical model which is normally generated from underlying inflation series
Second one is construction approach of measure of underlying approach and is done across price changes on major items over long period of time (Tony and Tom 2010),
There are two properties which need to be considered while measuring underlying inflation. Firstly a good proxy for underlying inflation should be unbiased with respect to CPI inflation measurement. Secondly, it should contains information about future price trends in CPI inflation over and above the information which only the CPI itself provides can provide and is about its future path growth (Tony and Tom 2010).
(iii) Discuss the role that is played by measures of underlying inflation in the setting monetary policy.
It helps the central bank in, monetary policy strategy of ensuring price stability within the economy. It is also used in forecasting process since underlying inflation methods are accurate. It is also used by banks officers in analyzing price movement trends over along period of time (Tony and Tom 2010),
Tony and Tom Roswell (2010), “Measures of underlying inflation,” RBA Bulletin, March.
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