Measuring Core Inflation in Bangladesh: The Choice of Alternative Methods

In view of formulating credible monetary policy to attain the price stability objective, the difficult part for the central banks is to distinguish, within ongoing inflation evolutions, between short term volatility and the underlying pressure of inflation. While it has now become a standard practice for most central banks around the world to monitor core inflation, no progress has so far been made in the Bangladesh context. This paper takes a pioneering look in measuring core inflation in Bangladesh focusing on the popular exclusion and trimmed mean approaches. The performance criteria adopted in this analysis show that the measure of core inflation developed in the paper has strong money-induced characteristics and therefore, can credibly be used as a short or medium term guide of monetary policy in Bangladesh.