Assessment of Core Inflation Indicators for Peru: 2002–2021

The objective of this study is to evaluate the usefulness of the core inflation indicators published by the Central Reserve Bank of Peru (BCRP). The main criterion for this evaluation is that the core inflation indicator should be an attractor of headline inflation. In other words, it must represent the trend toward which headline inflation converges. Given the nonstationary behavior of headline inflation, the criterion requires that three econometric conditions be met: (a) headline inflation and the core inflation indicator are cointegrated with a unitary cointegration vector [1, −1], (b) the core inflation indicator is weakly exogenous, and (c) the core inflation indicator is strongly exogenous. Four core inflation indicators are evaluated: (i) core inflation by exclusion (Inf CORE), (ii) inflation excluding food and beverages (Inf SAB), (iii) inflation excluding food and energy (Inf SAE), and (iv) core inflation excluding food and beverages (Inf CORESAB). The data used are monthly and cover the period from January 2002 through December 2021. The results for the pre-COVID-19 period (January 2002–February 2020) show that the Inf CORE, Inf SAB, and Inf CORESAB indicators meet the econometric criteria considered, as well as other standard criteria in the literature. The results are similar when the sample is extended to include the COVID-19 period (March 2020–December 2021).