By Barry Davidson
Wednesday 16 September 2009
According to a press release issued by the Bank of Israel on 8 September 2009, the indices of core inflation that do not show extreme price changes each month or sort components of the index by their volatility help in the understanding of the present inflation environment.
This research, conducted by the Bank of Israel, gives insight on the effect of inflation on the Israeli economy, not to mention the Tel Aviv Stock Exchange.
The index, which excludes food, energy, fruit, and vegetables, contributes to the assessment of expected inflation environment and may help in determining monetary policy.
It is the Bank of Israel, under the stewardship of Governor Stanley Fisher, that determines Israeli monetary policy.
And this determining of monetary policy has an effect on the rise and fall of stock trading on the TASE. For example, if pronouncement by Gov. Fisher is favorable, stocks on the TASE might rise. If he issues a negative statement, stock trading might fall, causing the indices of the TASE to close down.
The Bank of Israel's research also treats that topic of core inflation indices. The investigation of this topic was carried out by Dr. Sigal Ribon, a researcher with the Bank of Israel.
Dr. Ribon found that price indices that exclude extreme price changes every month or that weight the components of the index according to their volatility contribute to the understanding of the present inflation environment. That means that price changes alter inflation.
It was also found that the indices that exclude energy and food prices incorporate information that improves the ability to predict the overall CPI in the next few months.
The CPI is the cost price index. It measure the balance between price and cost of items sold in the marketplace.
It can be seen that in general the core indices are lower than the overall index. But from the end of 2008 they indicate higher inflation than that which was measured by the overall index.
Analyzing the path of past price changes and estimating the changes expected in the future are major elements in the determination of monetary policy in an inflation targeting regime.
Price developments in any particular period are affected by basic factors characteristic of the economy, and also by unexpected temporary fluctuations. These fluctuations are not part of the basic inflation environment, as they are self-correcting over time, and therefore make it more difficult for policymakers to assess the inflation environment.
Core inflation indices are intended to improve the situation by describing that part of price developments, affected by the basic factors that do not deal with the temporary fluctuations in the market.
As an outcome of this research, it was found that there is no one core inflation index that has a distinct advantage over others. It can also be stated that by and large the forecasting ability of the core indices with regard to future inflation is not very high.
