Description

Relative price shocks with zero mean can affect measured inflation in the presence of non-convex adjustment costs, if core inflation is different from zero or the distribution of the shock is asymmetric. In such cases, central tendency measures of the shock's distribution are a better measure of core inflation. The purpose of this paper is to calculate and evaluate the properties of the weighted median as an indicator of core inflation in Chile. This paper analyzes the cross sectional distribution of price changes in Chile. It is shown that this distribution is very asymmetric, and that the degree of asymmetry is an important explanatory variable of actual inflation. In comparison to CPI and more traditional measures of core inflation, the weighted median is more correlated to past innovations in monetary aggregates, and constitutes a better predictor of future inflation.