Which measure of inflation works best depends on the situation

The concept of core inflation includes many different measures and which of these the Riksbank analyses has changed over time. The most common measures are based on annual percentage change and the Riksbank has used these for a long time. However, in recent years since the pandemic, the focus has increasingly been on analysing measures of price changes over periods shorter than one year.

In their Economic Commentary, Johansson and Tysklind evaluate a number of measures used by the Riksbank, both how well they correlate with resource utilisation in the economy and how well they function as a predictor of future CPIF inflation. One conclusion is that measures of price changes over periods shorter than one year are usually not very good at forecasting future inflation measured as an annual percentage change in the CPIF.

However, the picture is not clear-cut. Over the past five years, which includes the period of rapidly rising and then rapidly falling inflation, measures calculated over shorter periods have been better than those calculated over longer periods. The conclusion is therefore that it may be worthwhile to analyse this type of measure during periods of large changes in the inflation rate. Under normal circumstances, however, they are too volatile and contain too much 'noise' to be useful.

Authors: Jesper Johansson and Oskar Tysklind, who work at the Monetary Policy Department.