The price of everything

This is a preview from the National Institute Economic Review, August 2018, no 245.

"The consumer price index is a fundamental economic statistic for households, firms and policymakers. This number summarises the prices of hundreds of thousands of goods and services across the country. Yet the behaviour of individual prices is erratic,
some rise and fall by an order of magnitude from one month to the next, others rarely change. These idiosyncrasies are central to understanding aggregate price dynamics (Gagnon, 2009; Nakamura et al., forthcoming).

What is the rate of inflation when the most volatile prices are excluded? This box, prepared by NIESR economist Jason Lennard, answers this question by constructing a measure of trimmed mean inflation, which excludes a fraction of the highest and lowest price changes each month, calculating the arithmetic mean across the remaining observations.1 We find that current trimmed mean inflation is a powerful predictor of future consumer price index inflation. Although trimmed mean inflation has fallen in recent months, it remains in line with the Bank of England’s target."