Further evidence on core inflation in Malta : a dynamic factor model approach

Abstract

A good core inflation measure is best placed to explain the true price pressures seen in an economy, rather than the overall index of consumer prices. This is especially so in periods of heightened inflation caused by short-lived or transitory shocks. This study defines a core inflation measure for Malta based on harmonised indices of consumer prices data from January 2006 to August 2022, using a dynamic factor model. The measure indicates that price inflation experienced in Malta post-March 2021 was not transitory in nature, and the current high rate of overall inflation is consistent with a period of persistent and generalised inflation. An understanding of the difference between core and headline inflation is particularly important for a small, open economy like Malta. The inflation rate presented in this paper is well-behaved, with a number of desirable properties: It is stable, unlike headline HICP inflation, and unbiased. The core inflation measure appears to be a good signal for policymakers and social institutions with an interest in price pressures and wage bargaining.