A Measure of Core Inflation for Monetary Policy Proposals in Peru

This article examines the need for a measure of core inflation in Peru, given the importance of effective monetary policy for economic stability in the post-hyperinflationary era. It addresses the question of how to identify and measure this core inflation, which excludes transitory shocks and reflects the persistent trend in prices. The research is based on monthly data from January 1991 through December 1999 and uses a structural vector autoregression (SVAR) approach to decompose inflation, as measured by the Consumer Price Index (CPI), into transitory and persistent components. The results indicate that core inflation (COREINF) is significantly affected by demand and price shocks, while transitory shocks merely add noise. Implications for economic policy suggest that the Central Reserve Bank of Peru should focus on core inflation when setting targets, avoiding responses to transitory shocks in order to maintain output stability and mitigate unnecessary economic costs. (Abstract and audio: Department of Economic Publications)