Measures Of Trend Inflation In Hong Kong

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Executive Summary

The concept of trend inflation is crucial for macroeconomic analysis and policy formulation by central banks. In this paper, the authors compare measures of trend inflation in Hong Kong estimated by the exclusion and statistical methods. These findings suggest that the trend inflation estimated by the exclusion method (by excluding basic food, energy and other volatile items) and the principal component technique have strong predictive power on future changes in headline CPI or PCE inflation. Evaluation results based on qualitative and quantitative criteria suggest that the two estimation methods have their own strengths and weaknesses, and none of the methods has clear absolute advantage over the other for measuring trend inflation.

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