A note on modelling core inflation for the UK using a new dynamic factor estimation method and a large disaggregated price index dataset

The term ‘core inflation’ is widely used by academics and central bankers, though there is no widely accepted definition or agreed method of measuring it. In this paper, we propose a new measure of core inflation which is atheoretical but assumes factor structure for the disaggregated price indices which underlie most constructed measures of inflation. We show that the measure of core inflation obtained has added predictive ability for inflation in the UK over a relatively long evaluation period.