Sri Lanka core measure may have understated inflation: IMF study

Aug 17, 2009 (LBO) - An official core-inflation index for Sri Lanka may have understated underlying price pressures in 2008, but there is wide disagreement even among proponents of core measures about their calculation and usefulness, a new International Monetary Fund study has said. "Although not stated explicitly, it was implied that headline inflation would gradually decline toward core inflation and therefore that the official measure of core inflation in Sri Lanka was a leading indicator of future headline inflation."

But then headline inflation had plummeted dramatically below 1.0 percent and the consensus is that inflationary pressures are low.

Now the core-measure was below headline inflation.

Why?

The IMF study said core inflation indices were built as they were thought to be an early warning or leading indicator of consumer price inflation and that it removed movements in prices due to transitory shocks over which the monetary authorities have no control.

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However the first argument was subject to the Lucas critique, which says human counter responses to observed past data can change future outcomes.

Other critics have also challenged the idea that paper monetary authorities only have control over some price trends but not others.