Page 17 - Invited Paper Session (IPS) - Volume 2

IPS178 Sana Antoine S. J.
The influence of each component on the headline inflation is simply the
product of its weight by its year-on-year change. The link between imported
inflation and this approach comes from the fact that prices in some of the
sectors are exclusively determined by the outside world, such sectors include
energy and food items. Consequently, a first assessment of the impact of
imported inflation can be made by computing the share of volatility in CPI due
to these components.
Furthermore, an alternative for constructing a core CPI measure is to
exclude the “external” items from headline CPI and re-weight the remaining
items on a prorata basis (exclusion method).The new core price level includes
goods 1 to m, and fully excludes goods m+1 to n. The denominator rescales
the weights for commodities 1 to m and commodities m+1 to n are re-
assigned to have weights zero.

∑ × 100
=1 0
P t core =

∑

=1
Where m≤n
Several other methods are used to compute core inflation: Trimmed mean,
principal component analysis, volatility weights, and permanent and variable
4
exclusion approaches .The exclusion method is the most common approach
(used by several Central Banks) due to its simplicity. For the case of Lebanon,
a core CPI excluding Energy and Food has been computed and applied to the
CPI series calculated by the Central Administration of Statistics (CAS) since
2008. It excludes both Food and Energy categories (with a weight of 31.8%)
from the CPI index.

4 A detailed presentation of these methods can be found in an IMF Staff paper written by
Mick Silver (check references).
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