which grow more slowly than current CPI. Thus, we transfer the concept of the
diffusion index, which was proposed by Burns and Mitchell (1946), to prices.
Similar indicators are used in the context of technical share price analysis, under
the term of “advance-decline”. With πi,t being the price increase of i-th of N
goods and services in quarter t and πt still being the headline inflation rate, the
indicator is formally calculated as:
sDif = ɪ"γ1N VDff (π ) VDif (π ) = (ɪfor πi,t ≥ πt (2 2)
st N∑i=1V πt), V (π,t) lɪfor ∏i,t < ∏t ■ V-2)
To capture the momentum of inflation growth a third indicator, stMom , calculates
the difference between the share of the price series which exhibit an increasing
growth rate and the share of prices which show a decreasing growth rate:
Nm N ν л ʃ ™ - ɪ ɪ for ∏/1 ≥ π 11
Mom ɪ N Mom Mom i,t i,t-ɪ
s. = У∑=tV (π-t). V (π,..) = lɪfor∏u<∏t-ɪ. (2.3)
None of our inflation sentiment indicators does require any a priori assessments
on the issue of which might be the products with highly volatile prices. Those
would have to be excluded, if we were trying to measure core inflation. Instead, in
our analysis all individual price series are used to capture whether inflation is
broad-based or not. Moreover, our approach does not require any explicit expendi-
ture weights to filter out price movements which are perceived by private house-
holds in a particular way. Instead, items are implicitly re-weighted, following the
assumption that the number of representative products in a certain expenditure
category coincides with the importance of that category for the formation of infla-
tion sentiment.
In our analysis, we also probe the forecasting potential of two prominent core
measures, the weighted median πtWMed and a 20%-trimmed mean πttr20 .4 Specifi-
cally, we define stWMed = πtWMed - πt and sttr20 = πttr20 - πt . Table 2 reports correla-
tion coefficients between each of the various sentiment indicators and the differ-
ences between these measures of core inflation and inflation, respectively. All
these correlations are quite large, especially those involving the trimmed mean.
This can be explained easily. In a situation in which inflation is triggered by only a
few items, there is a high probability that they will be trimmed, i.e. excluded from
the core measure. This is not likely to happen if inflation is instead supported by
many product categories. All in all, sophisticated core measures such as the
4 For the computation see e.g. Rich and Steindel (2005).