Towards a Measure of Core Inflation in Bangladesh: Conceptual Issues

Identifying core inflation has become a very important issue for the Central Banks of the world for last few years. It has also become a practice to monitor the core inflation along side the headline inflation in many countries including both inflation and non-inflation targeting ones. The concept of core inflation is to identify the more persistent trend by separating the noise and short-run fluctuations in the total Consumer Price Index (CPI). Thus far, the price stability objective of the Bangladesh Bank (BB) has been guided by the developments of total CPI. However, changes in the total CPI can be affected by some components that are highly volatile in the short-term. Sources of such fluctuations may be the good and bad harvests, disruption in external trade and so on that creates transitory noise in CPI. Hence the headline inflation loses its credibility as a short or medium term guide in the operation of monetary policy. Consequently, a growing number of countries are adopting the concept of core inflation in making monetary policy decisions. The purpose of the note is thus to develop the notion of core inflation for the policy purposes in Bangladesh.