Should Bangladesh Monitor Core Inflation for Conducting Monetary Policy?

Over the years, the Bangladesh Bank (BB) has been using changes in consumer price index (CPI) inflation as the operational guide to measuring price stability in Bangladesh. In recent years, it has however been argued that as a short and/or medium term guide to the operation of monetary policy, CPI inflation has limitations especially due to the existence of some volatile and non-trend components within the CPI (Berkmen 2002, Bagliano and Morana 2003).2 Often, the sources of short term fluctuations in CPI inflation may lie in some components that are transitory and reversible; and these may be characterized by supply-side shocks or other non-monetary events. It is important, therefore, to exclude the impact of these transitory phenomena in measuring price level changes for the purpose of policy decisions of the monetary authority (see Bryan and Cecchetti 1993). This note uses relevant statistical measures to provide estimates of core inflation in Bangladesh.