Underlying Inflation in Australia : Are the Existing Measures Satisfactory?

A number of measures of the underlying rate of inflation are reported for Australia. We formulate criteria that an acceptable underlying rate must satisfy and then test to see whether any of the current measures satisfy these criteria. We find that for the period since inflation targeting began, none of the underlying series satisfy all criteria. We then examine the results of an 'Unobserved Components' decomposition and show that it not only provides useful information on underlying inflation in Australia, but also provides support for the decision, in 1998, of the Reserve Bank of Australia to switch the target from an underlying series to the headline rate itself