The central bank's policy analysis unit (PAU) has recommended introduction of a method to measure the 'core' inflation, alongside the existing one used for measuring annual average and point-to-point inflation, in order to formulate credible monetary policies and forecast inflation.
"....it is important for the Bangladesh Bank (BB) to come up with an official measurement of core inflation that would help in formulating credible monetary policy and assist in forecasting inflation," the PAU said in a study report released recently.
The policy note styled 'Should Bangladesh Monitor Core Inflation for Conducting Monetary Policy?' also said that central banks in an increasing number of countries now routinely publish and monitor core inflation.
Core inflation is a measurement of inflation, which excludes temporary noise components from consumers' price index (CPI).
The key objective of computing core inflation is to segregate the components of inflation that are caused by non-monetary events as the price changes do not reflect the impact of underlying monetary policy decisions.
Such events may include natural disasters (like floods and cyclones), volatility in international markets and other macroeconomic and sector specific shocks, according to the study.
In South and Southeast Asia, many countries including Pakistan, the Philippines and Thailand regularly publish and monitor the core inflation.
Sri Lanka has recently started to monitor core inflation measured by non-food and non-energy items.
"Apart from the short-run analysis, to use in policy purposes it is important to evaluate the performance of the core measure on the basis of its ability to track the trend inflation," the PAU noted.
The core inflation provides a better measurement of inflation and constitutes a more consistent short term policy guide to understand inflationary pressure in the Bangladesh economy, the study said, mentioning the difference of movement of CPI and core inflation.
"There is no usefulness of the 12-month moving average to formulate a short-term monetary policy," a BB senior official told the FE Saturday.
He also said the 12-month average inflation always follow the point-to-point inflationary trends.
Currently, the BB monitors twelve-month moving average of CPI inflation in defining the underlying trend that averages out the short-term or transitory components in the CPI.
"While the moving average or other smoothing measures no doubt tend to reduce the volatility and may better reflect the persistent elements, it has serious limitations as a policy tool," the study added.
In view of the importance of price stability as a prime goal of monetary policy in Bangladesh, it is necessary for the central bank to routinely measure core inflation and use it in formulating its monetary policy stance, the PAU also recommended.
