Core Inflation in a Transition Economy (The Romanian Case)

The “core price index” is considered to be the component of headline (officially measured) price index which reflects price changes that tend to become irreversible. Being fully accommodated, the core price index does not affect the global real output on medium and long-run. Is this 'global indifference' synonymous with a complete absence the structural changes in the real output, that is associated with a strong inflexibility of relative prices on medium and long-run? The present paper promotes a more relaxed interpretation. The following factors are taken into account: a) a significant relationship exists between the variance of relative prices and the rate of inflation or deflation; b) some variations of the relative prices are persistent reflecting changes in the equilibrium conditions, whilst others reveal only the temporary mismatch between demand and supply on different markets; c) persistent changes happen at a slower pace than others, the real economy being more inertial than its nominal alter ego. In this context, the paper defines a coefficient for persistent relative price changes, and considers, as a main assumption, that this coefficient has a quantifiable level. The core price index would then be estimated incorporating the individual price indices for which the newly calculated coefficient of relative price changes does not exceed its typical level for the respective period. The calculus algorithm is presented, and used for an illustrative application on Romanian consumer price index statistics