CPIM : A Model-Based Indicator of Underlying Inflation
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The CPIM is a new indicator of underlying inflation (see the October 2010 Monetary Policy Report). This indicator is based on the predictive power of the sub-indices of the CPI and thus differs somewhat from other indicators Norges Bank uses. [...] For each of the 34 sub-indices we have a simple model that projects the CPI one month ahead. The projections are weighted and averaged to an aggregate CPI projection. The sub-indices that over time more accurately explain movements in the CPI are then given a high weight in the CPIM. Conversely, the sub-indices that are less successful at capturing movements in the CPI will receive a lower weight. The weighted averaged projection provides an indication of underlying CPI inflation. We demonstrate that the CPIM has good properties as an indicator of underlying inflation. Over time, the indicator has moved largely in line with the CPI. In addition, it has been more stable, which may indicate that the CPIM removes noise in the CPI without changing the underlying rate of increase. An additional advantage is that the indicator utilises the entire range of CPI data.