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Mills, Terence C.
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[Journal:] Econometrics [ISSN:] 2225-1146 [Publisher:] MDPI [Place:] Basel [Volume:] 1 [Year:] 2013 [Issue:] 1 [Pages:] 32-52
The recent volatile behaviour of U.K. inflation has been officially attributed to a sequence of 'unusual' price changes, prompting renewed interest in the construction of measures of 'core inflation', from which such unusual price changes may be down-weighted or even excluded. This paper proposes a new approach to constructing core inflation based on detailed analysis of the temporal stochastic structure of the individual prices underlying a particular index. This approach is illustrated using the section structure of the U.K. retail price index (RPI), providing a number of measures of core inflation that can be automatically calculated and updated to provide both a current assessment and forecasts of the underlying inflation rate in the U.K.
core inflation
index numbers
signal extraction
time series modelling
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