Stability Price Index, Core Inflation and Output Volatility

This paper examines the relationship between the ‘exclusion’ type core inflation measures and the stability price index. Empirical results for Malaysia and Pakistan suggests that, if targeting core inflation index is to stabilize output, weights of the export-oriented sectors (energy for Malaysia and foodstuffs for Pakistan) should be reduces, in relation to the consumers’ price index weights, and for import-oriented sectors, increased. It also indicates that, in order to maintain real sector stability, central bankers should include the fundamental component of the stock market prices in the price index they target.