MNI: Core Combo Best Price Indicator-BCB Advisor
MNI (BRASILIA) - A combination of five core inflation measures used by the Central Bank of Brazil in its macroeconomic models performs better in predicting price trends than any single measure, an advisor to the BCB who has just published research on the issue told MNI.
The findings in the study by Vicente da Gama Machado, though in line with other recent research, contrast with the results of BCB studies using similar methodologies from 2018 and 2020. However, while this suggests that inflation dynamics were significantly impacted by the pandemic period, Machado highlighted that this does not necessarily imply a structural change.
"The fluctuations stemming from the pandemic impacted the statistical results in the most recent period, but a longer time horizon is required to assess whether these changes are temporary or structural," he said in answers to emailed questions.
During significant shocks, such as the pandemic, core inflation measures tend to gain importance by providing a more stable view of underlying inflation, he noted,
SMOOTHS OUT SHOCKS
"The average of different measures shows superior performance, as it tends to smooth out the effects of specific shocks. By combining various core measures, the average reduces volatility and better captures the underlying inflation trend, resulting in more stable forecasts” he said, emphasizing that his work reflects only his views as a researcher and not necessarily those of the central bank.
"It is important to note that the Central Bank does not directly use core measures in its small semi-structural models," he added.
"The core average shows an overall good performance," he wrote in his paper. "Consequently, focusing on the core average, as both the BCB and private agents have done in recent years, appears to be a reasonable strategy." (See MNI INTERVIEW: BCB To Up Pace In Short Hiking Cycle - Kanczuk)
Brazil's IPCA inflation was 4.42% in September, up from 4.24% in August, driven by higher energy costs, and above the BCB’s 3% target. While there is no official core inflation statistic, the central bank provides its methodology for analysts to replicate, and September’s reading was calculated by MGM at 3.85%.
In September, the BCB raised its Selic rate by 25bp to 10.75%, in its first hike since August 2022 after holding borrowing costs steady for two consecutive meetings following nearly a year of aggressive easing.