Core Inflation Measures for Pakistan

An appropriate measure of monetary inflation is not only essential for taking prompt monetary policy decisions, but also in explaining them. Headline measure of inflation in terms of Consumer Price Index includes both monetary and short run non-monetary changes in prices. The concept of core inflation is to purge the components of transitory and non-monetary changes from the CPI basket. This is all the more desirable when distribution of price changes departs from normality, as is the case in Pakistan as well as in the other countries. Some of the alternative measures of core inflation are constructed in this paper and among these, it is found that trim-based measure compares favorably with those based on methods of excluding fixed items from the basket of CPI.