Core versus headline inflation targeting in Thailand

September 2006

Abstract

This paper analyses the choice between targeting core or headline inflation in Thailand. It frames the choice as one of whether a measure of core inflation serves as a useful intermediate target between the operating target of a short-term interest rate and the ultimate objective of headline inflation or some broader measure of price stability. It is argued that the shift in the global terms of trade between manufactures and commodities has presented a systematic challenge to the usefulness of core measures as intermediate targets, analogous to the role of financial innovation in breaking down the relationship between monetary aggregates and nominal GDP a generation ago. In light of this discussion, the paper examines international practice. Then the record of core inflation as an intermediate target is examined for the inflation targeting period in Thailand. The deficiency of the measure of core inflation used may not be unique to it: an alternative measure of core inflation would not have performed in a satisfactory manner either. Finally, transition and design issues are highlighted in a potential shift away from using core as an intermediate target, drawing on the experience of similar shifts by Sweden, the United Kingdom and Korea