Extracting the inflation trend: a comparison of core inflation measures

(*worked in the division when the report was written) I nflation can be volatile. For example, in the space of barely 18 months from July 2008 to December 2009, retail prices in France are likely to vary by more than 4 points year-on-year, from a high point of 3.6 % in July 2008 to a low point forecast at-0.7 % in July 2009, before climbing back to around 0.6 % in December 2009. For the monetary authorities, whose main objective is to keep inflation at a low level over the medium term, it is therefore important to be able to distinguish the volatile part of inflation from its trend. Economists call this trend “core ” inflation. This report examines the various indicators that these economists have put forward to estimate core inflation. Ideally, a core inflation indicator should meet three criteria: it has to play the role of “attractor ” of future inflation, which should thus converge towards cor