A small number of inflation components have experienced some very large price increases. This is one reason why the South African Reserve Bank monitors exclusion measures such as core inflation that strip out volatile components such as food and fuel. However, the problem with this approach is that it does not deal with the fact that there are many other components sit in the tails of the inflation distribution and deviate persistently from the inflation target. This is why additional measures of underlying inflation (one we monitor is our CPI-common measure) need to be used for evaluating inflation and modelling the relationship between inflation dynamics and the macroeconomy. Today’s post by Aidan Horn shows that the dispersion is also time-varying.
Compiled by Aidan Horn
