Evaluating core inflation measures for Peru: 2002-2021

We evaluate the usefulness of core inflation measures published by the Central Reserve Bank of Peru (BCRP). The main criterion for this evaluation is that a core inflation measure should be an attractor for headline inflation, that is, it must represent the trend towards which headline inflation converges. Given the nonstationary behavior of headline inflation, the criterion requires three econometric conditions to be satisfied: (a) Headline inflation and the core inflation measure cointegrate with a unit cointegration vector [1, -1], (b) the core inflation measure is weakly exogenous, and (c) the core inflation measure is strongly exogenous. Four core inflation indicators are evaluated: (i) exclusion-based core inflation (CORE), (ii) inflation excluding food and beverages (SAB), (iii) inflation excluding food and energy (SAE), and (iv) core inflation excluding food and beverages (CORESAB). We use monthly information for the period January 2002 - December 2021. The results for the pre-Covid sample (January 2002-February 2020) show that CORE, SAB, and CORESAB are good core inflation measures. These results remain similar if the post-Covid period (March 2020 - December 2021) is included.