Evaluating core inflation measures in Brazil

Abstract

This paper evaluates four core inflation indicators used by the Central Bank of Brazil; that is, the exclusion indicator, the exclusion ex2 indicator, the smoothed trimmed mean and the double weight indicator. Econometric time series models were used to assess the unbiasedness, the dynamic adjustment, and the predictive ability of core inflation indicators. The results show that only the exclusion ex2 and smoothed trimmed mean were unbiased and they can serve as indicators of dynamic adjustment for in- flation. With respect to forecast ability, one can say that the core inflation indicators used by the Central Bank are not suitable to forecast long-term inflation