Measuring Undeylying inflation in Papua New Guinea

Measuring Underlying inflation in Papua New Guinea.pdf

This paper assesses the value of the Bank of Papua New Guinea’s underlying

inflation measures: exclusion-based and trimmed mean. Results indicate that

whilst the exclusion-based measure is an unbiased estimator of CPI inflation, the

trimmed mean has a small and negative bias with respect to CPI inflation.

Evidence also suggests that when a gap emerges between CPI inflation and

underlying inflation, CPI inflation tends to adjust toward both underlying inflation

measures and also towards a constant rate of inflation. It was additionally

observed that whilst underlying inflation did not adjust toward CPI inflation, both

measures tended to adjust toward a constant rate of inflation. The paper

concludes that both underlying inflation measures are good indicators of CPI

inflation and that, at present, the trimmed mean measure is preferred over the

exclusion-based.

Abstract