RDP 2009-06: Inflation Volatility and Forecast Accuracy Appendix B: Simple Measures of Inflation Behaviour

Table B1 shows a collection of simple measures that could be used to evaluate central bank performance. The ‘Headline’ columns are based on the year-ended growth in the data series that were described in Appendix A. The ‘Core’ columns use the following data series: Australia, trimmed mean CPI (15 per cent trim); Canada, CPI excluding food, energy and indirect taxes; Japan, All Cities CPI excluding fresh food; New Zealand, PCPITA, the CPI measure being targeted in a given quarter; Sweden, CPI excluding mortgage interest payments; UK, RPIX until 2003:Q2, with CPI thereafter; US, personal consumption expenditures deflator.

Table B1: Inflation Behaviour
Mean Std dev MAD Outside band
Headline Core Headline Core Headline Core Headline Core
IT countries
Australia 2.54 2.26   0.68 0.42   0.51 0.37   25 16
Canada 2.08 1.87   1.29 0.66   0.88 0.53   17 5
NZ 2.28 2.21   1.30 0.81   1.06 0.68   26 19
Sweden 1.47 1.69   1.35 0.87   1.16 0.78   31 21
UK 2.61 2.39   0.80 0.51   0.87 0.53   22 1
Non-IT countries
Austria 1.94   0.85   0.68  
France 1.61   0.56   0.42  
Germany 1.73   0.93   0.66  
Japan 0.11 −0.03   0.85 0.59   0.64 0.45  
US 2.60 2.08   0.67 0.59   0.54 0.46  
Notes: Following Kuttner (2004), we chose samples that begin as follows: Australia, at 1993:Q1; Canada, at 1991:Q1; New Zealand, at 1989:Q4; Sweden, at 1993:Q1; and the UK, at 1992:Q4. The samples for non-IT countries begin in 1993:Q1. All the samples end in 2007:Q1. For a description of the various core (or underlying) measures see main text above.

The ‘Mean’ and ‘Std dev’ columns show the sample mean and sample standard deviation of inflation during the period in question. For IT countries, ‘MAD’ is the mean absolute deviation from the centre of the target band; and ‘Outside band’ is the number of quarters during which the inflation measure was outside the target, allowing for changes to the target band where appropriate. Australia targets a headline inflation rate of 2 to 3 per cent on average over the business cycle; Canada targets 2 per cent inflation in headline CPI, with a range of 1 to 3 per cent; New Zealand initially targeted a range of 3 to 5 per cent, then 0 to 2 per cent from 1992 to 1996, then 0 to 3 per cent from 1997 to 2001, then 1 to 3 per cent from 2002 onwards; Sweden targets 2 per cent inflation, with a tolerance interval of 1 per cent either side (the target, announced in 1993, became effective in 1995); and the UK initially targeted 1 to 4 per cent RPIX inflation (with an objective to be in the lower half of that range by the end of the 1992–1997 Parliament), then 2.5 per cent RPIX inflation with a tolerance interval of 1 per cent either side from 1996 to 2003, then 2 per cent CPI inflation from 2004 onwards, with a formal explanation required for deviations of more than 1 per cent either side of the target. For non-IT countries, the ‘MAD’ column is the mean absolute deviation from the sample mean.