The main reason to study core inflation is to find the calculations related to money growth. For that we must take into account the ability of money growth to predict each alternative inflation calculation in a simple regression. In simple regression the relationship between money growth with inflation calculation described by the following formula:
1/K (ln P^{r}_{t+K}) – ln P^{r}_{t} = a + S b (ln M_{1} – ln M_{t-i}) + e_{t}
_{Where M is the size for the money}
We see the ability of the monetary base, M1 and M2 to calculate the average rate of inflation for one to five years. Results for m = 24 months, where it represents is shown in table 1.1. where the report of the R2 of regression. On the table shows that year on money growth is associated with changes dalamweighted median, with 15% discount on average.
Forecasting Long-Horizon Inflation with Money Growth (1967:02 to 1992:12)
Table 1.1
Horizon (K) | All item Consumer Price Index | Consumer Price index Exluding Food and Energy | Weighted Median | 15% Trimmed Mean |
M = Monetary Base |
12 | 0.16 | 0.19 | 0.19 | 0.18 |
24 | 0.16 | 0.22 | 0.22 | 0.21 |
36 | 0.13 | 0.19 | 0.17 | 0.17 |
48 | 0.07 | 0.14 | 0.10 | 0.10 |
60 | 0.03 | 0.11 | 0.06 | 0.06 |
M =M1 |
12 | 0.03 | 0.03 | 0.04 | 0.03 |
24 | 0.01 | 0.01 | 0.01 | 0.01 |
36 | 0.02 | 0.01 | 0.03 | 0.02 |
48 | 0.10 | 0.07 | 0.11 | 0.10 |
60 | 0.17 | 0.12 | 0.18 | 0.16 |
M =M2 |
12 | 0.19 | 0.12 | 0.22 | 0.18 |
24 | 0.24 | 0.23 | 0.32 | 0.28 |
36 | 0.24 | 0.27 | 0.33 | 0.30 |
48 | 0.18 | 0.25 | 0.26 | 0.24 |
60 | 0.10 | 0.16 | 0.15 | 0.14 |
Then we connect with the sequence of tests for Granger-style building in which money growth may affect inflation. Then we take the value of the previous inflation ability to estimate the amount of such influence. Previous research has found the test of this type that shows a causal relationship between the CPI and the operation of money in the opposite direction. From inflation to money growth.Namely Study by Hoover (1991). It can be concluded from Hoover's statement as a suggestion that the movement in the aggregate price index is the dominant standard by disorders that affect the money supply and prices.
For the variable y against x in Granger, we test the coefficient of x in the regression, namely:
Y_{t} = a + S b_{i }y_{t-i} + S c_{i} x_{t-i}_{ }+ u_{t}
We get the results of the test is whether all ci are equal to zero.
Forecasting CPI Inflation
It is very difficult to predict inflation in the medium and long term by using univariate setting danmultivariate. However, we tested the ability of the difference calculation is to calculate the price of actual inflation in the period of one to five years.
Univariate methods
First, we study the univariate calculation of CPI inflation over the period of one to five years. The calculation of this unvariated where core inflation is lower than the CPI inflation in all consumer products or CPI without food and energy included.
P_{t}^{k} = 1/K íln(CPI_{t+k }) – ln(CPI_{t})ý
Where K indicates one, two, or three years.
Conclusion
The calculation of core inflation which in addition to the CPI calculation is almost close to the expected inflation rate of all components associated with the consumer. Also performed calculations with a median inflation and a discount of 15% from the mean inflation. And measurement has the properties: a lower level of discrepancy and have a higher resistance than the CPI inflation, can be used to improve the calculation of inflation in the future, and is associated with the growth of money before the calculation rather than money growth thereafter.
This article examines the influence of the estimator of limited usefulness as a measure of core inflation. We study the CPI excluding food and energy, and some estimates are based on the distribution of research inter division of inflation in each month, which includes the weighted median. The usefulness of this estimator is to observe symptoms of non-monetary economy that appears, at least temporarily.
According to Otto Eckstein understanding of core inflation is a trend where the rising cost of production factors. And at first is a long-term expectations of inflation by the thought of its households and businesses.
One of the purposes of calculating core inflation is to develop a measurement of inflation that is useful to formulate monetary policy.Precisely, what information must be owned by policy makers and how does that relate to core inflation. For any possibility of monetary policy, ie what is expected of real output and inflation. An example is still holding the growth of the monetary base constant, from what was expected rate of inflation and real output growth in every ten years later.
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