Core Inflation and the Business Cycle

We estimate various measures of core inflation which remove temporary disturbances from price indicators and examine their characteristics over the business cycle. In particular, we focus on some new measures of core inflation for Japan, the mode and weighted median inflation rates, which represent shifts in the price change distribution, as well as the CPI excluding fresh food and energy, which the Bank of Japan has recently focused on. Measures of core inflation that simply exclude volatile items closely follow the business cycle as measured by the output gap, while measures such as the mode and the weighted median are much more weakly linked to developments in the output gap.