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Core Inflation Requiem: Paving the Way for a Dual-Component CPI in FPAS Central Banks

The National Bank of Georgia’s (NBG) Working Papers are published to elicit comments and encourage debate on ongoing research. Working Paper Series aims to present original research contributions relevant to central banks. The views expressed here are those of the author(s) and do not necessarily represent the views of the NBG. No responsibility for them should be attributed to the NBG.

,,We advocate for a novel approach to decomposing the Consumer Price Index, critiquing the traditional core inflation distinction (which omits volatile items like food and energy) for lacking a solid economic basis. Our proposed method, inspired by practices in economies like the United States, New Zealand and Armenia, categorizes prices into “flexible,” which adjust quickly and are influenced by external factors, and “sticky” non-tradables2, which adjust more slowly, offering a clearer view of medium-term inflation expectations. This approach underscores the importance of economic analysis over simplistic statistical methods that exclude volatile CPI components. It emphasizes the need for economists to understand the dynamics driving both sticky and flexible price inflation, with the latter often signifying initial signs of excess demand pressures. Recognizing the impact of dollarization, where exchange rate depreciations quickly affect nontraded sticky prices, becomes crucial. This understanding is vital for formulating monetary policies that prevent long-term inflation expectations from escalating, highlighting the significance of studying the interplay between exchange rate movements and domestic price dynamics in dollarized economies”.

Authors: Shalva Mkhatrishvili, Douglas Laxton, Tamta Sopromadze, Mariam Tchanturia, Ana Nizharadze, Sergo Gadelia, Giorgi Gigineishvili, Jared Laxton