SELF-SIMILAR BEHAVIOR OF CPI HEADLINE INFLATION AND THE ROLE OF HURST EXPONENT IN DETERMINING CPI CORE INFLATION
T. V. Krishna and D. M. Reddy
This paper aims to study the self-similarity behavior of inflation using the Hurst index. Previous studies reported the presence of long-range dependence (LRD) behavior in the inflation of some countries. Inspired by these facts, we examined the monthly consumer price index (CPI) headline inflation of India to check the self-similarity or LRD behavior. The current study to compute the Hurst index is based on different approaches methods like the R/S method, Variance-time method, Higuchi’s method and Average periodogram method. This Hurst parameter estimate gives an idea about the strength of the self-similar nature in CPI headline inflation of India. A necessary condition for the core inflation indicator is stated in terms of the Hurst index value. The Hurst index value of conventional exclusion based measures of CPI headline inflation are compared for the possibility of being a core inflation indicator. The present study plays a prominent role in the determination of core inflation in the Indian context.
Keywords: CPI, Hurst Index, Self-similarity, Core Inflation.