Core Inflation Indicators for Saudi Arabia

Abstract

This paper constructs and analyzes core inflation indicators for Saudi Arabia for the period of March 2012 to May 2014 using two alternative approaches: the exclusion method (ex food and housing/rent) and the statistical method. The findings of the analysis suggest that the ex food and housing/rent inflation is more volatile than the overall CPI inflation over the sample period. In contrast, the statistical core inflation is relatively more stable and less volatile. Moreover, the ex food and housing/rent inflation is only weakly correlated with headline inflation, whereas the statistical core inflation exhibits a stronger correlation. This combination of lower volatility and higher correlation with headline inflation makes the statistical method a much better choice for policymakers. From a monetary policy standpoint, using a bundle of core inflation measures, including both properly constructed exclusion and statistical methods, is more desirable, especially when variation across measures is widespread, as is the case in Saudi Arabia.

Key words: Consumer price index, Core inflation, Generalized dynamic factor model, Monetary policy.
JEL: C51, E31, E58.