Core Inflation Requiem: Paving the Way for a Dual-Component CPI in FPAS Central Banks

Shalva Mkhatrishvili (), Douglas Laxton (), Tamta Sopromadze (), Mariam Tchanturia (), Ana Nizharadze (), Sergo Gadelia (), Giorgi Gigineishvili () and Jared Laxton ()
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Shalva Mkhatrishvili: Head of Macroeconomics and Statistics Department, National Bank of Georgia
Douglas Laxton: NOVA School of Business and Economics, Saddle Point Research, The Better Policy Project
Tamta Sopromadze: Head of Monetary Policy Division, National Bank of Georgia
Mariam Tchanturia: Macroeconomic Research Division, National Bank of Georgia
Ana Nizharadze: Macroeconomic Research Division, National Bank of Georgia
Sergo Gadelia: Macroeconomic Research Division, National Bank of Georgia
Giorgi Gigineishvili: Macroeconomic Research Division, National Bank of Georgia
Jared Laxton: Economist at Advanced Macro Policy Modelling (AMPM)

No 01/2024, NBG Working Papers from National Bank of Georgia

Abstract: We advocate for a novel approach to decomposing the Consumer Price Index, critiquing the traditional core inflation distinction (which omits volatile items like food and energy) for lacking a solid economic basis. Our proposed method, inspired by practices in economies like the United States, New Zealand and Armenia, categorizes prices into "flexible," which adjust quickly and are influenced by external factors, and "sticky" non-tradables, which adjust more slowly, offering a clearer view of medium-term inflation expectations. This approach underscores the importance of economic analysis over simplistic statistical methods that exclude volatile CPI components. It emphasizes the need for economists to understand the dynamics driving both sticky and flexible price inflation, with the latter often signifying initial signs of excess demand pressures. Recognizing the impact of dollarization, where exchange rate depreciations quickly affect nontraded sticky prices, becomes crucial. This understanding is vital for formulating monetary policies that prevent long-term inflation expectations from escalating, highlighting the significance of studying the interplay between exchange rate movements and domestic price dynamics in dollarized economies.

Keywords: Non-tradable sticky prices; Monetary policy credibility; Core inflation (search for similar items in EconPapers)
JEL-codes: E10 E31 E52 E58 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2024-04
New Economics Papers: this item is included in nep-ban, nep-cba, nep-ifn, nep-mon and nep-tra
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