Measuring core inflation in India: An asymmetric trimmed mean approach

Abstract

The paper seeks to obtain an optimal asymmetric trimmed mean-based core inflation measure in the class of trimmed mean measures when the distribution of price changes is leptokurtic and skewed to the right for any given period. Several estimators based on asymmetric trimmed mean approach are constructed and estimates generated by use of these estimators are evaluated on the basis of certain established empirical criteria. The paper also provides the method of trimmed mean expression “in terms of percentile score.” This study uses 69 monthly price indices which are constituent components of Wholesale Price Index for the period, April 1994 to April 2009, with 1993–1994 as the base year. Results of the study indicate that an optimally trimmed estimator is found when we trim 29.5% from the left-hand tail and 20.5% from the right-hand tail of the distribution of price changes.

Keywords:

• core inflation
• inflation
• asymmetric trimmed mean
• Wholesale Price Index

Public Interest Statement

Core inflation is a concept that focuses on capturing the underlying inflationary tendency of an economy by trying to eliminate the transient (or noise) components in observed inflation. The objective of the paper is to find an optimal asymmetric trimmed mean-based core inflation measure for India. It is argued that asymmetric trimming procedures are more appropriate when the distribution of price changes itself is skewed and leptokurtic. The paper computes several trimmed mean measures and subsequently evaluates them according to a set of prespecified empirical criteria, in order to find the best measure in a class of the trimmed means measures. Among the several trimmed means, an asymmetric trimmed means series is seen to satisfy all the necessary evaluation criteria of core inflation. Therefore, it is presented as a suitable measure of core inflation indicator for India.

Acknowledgments

The authors are grateful to Prof. Carlos Robalo Marques of Banco de Portugal for providing the program for computing the asymmetric trimmed mean as well as for his valuable comments and suggestions. The authors are also thankful to Prof. Bandi Kamaiah for his valuable suggestions. An earlier version of this paper was presented at the 13th Annual Conference on Money and Finance at IGIDR, Mumbai, in February 2011. The authors are grateful to the participants of the conference for useful discussion. The authors are also thankful to two anonymous reviewers for their helpful comments and suggestions.

Cover image

Source: Authors.

Notes

1. Empirical evidence as summarized in Roger (2000), clearly suggests that the distributions of price changes in different countries and time periods are found to be leptokurtic and positively skewed.

2. Measured inflation, headline inflation, and Wholesale Price Index (WPI) inflation are used here as interchangeable terms.

3. This is also true for any trimmed mean that put relatively more weight on right hand tail of the distribution.

Additional information

Funding

Funding. The authors received no direct funding for this research.

Notes on contributors

Naresh Kumar Sharma

Naresh Kumar Sharma is a professor in the School of Economics, University of Hyderabad, India. After a BTech in Mechanical Engineering from IIT Kanpur, he obtained his PhD in Economics from the Indian Statistical Institute (Delhi Center). He holds the position of the coordinator of the Programme for Gandhian Economic Thought at the University of Hyderabad. His other research interests are in the areas of development economics and economic theory.

Motilal Bicchal

Motilal Bicchal has obtained his PhD in Economics from the University of Hyderabad, India, under the supervision of Prof. Naresh Kumar Sharma and Prof. Bandi Kamaiah. This paper forms part of his PhD work. He is an assistant professor at the Department of Economics, Sangameshwar College, Solapur, India.