Core Inflation Indices for Israel
This study examines a wide variety of core indices of the consumer price index (CPI). The quality of the indices is examined from the aspect of simplicity of calculation, and their ability to describe and assess the current inflation environment and to predict the future inflation environment. For the purpose of examining the appropriateness of monetary policy ex post, and also to help determine policy for the future, it is important to focus on core inflation, i.e., inflation excluding unexpected shocks that are not affected by monetary policy.
The study reviews twenty-three indices, most of which are generally accepted in the literature. In line with the findings in other countries, it was found that no single index stands out as preferable to the others. The indices that give weight to the CPI's components according to their variance and the index that trims twenty percent of the upper and lower tails of the distribution contribute to the understanding of the current inflation environment. The index that excludes energy and food prices, the index that excludes also fruit and vegetable prices, and a more complex index based on an estimate of a VAR system provide information that improves the ability to predict the overall index.