A Robust Measure of Core Inflation in Saudi Arabia: Empirically Investigating the Trimmed Mean and the Median CPI

Abstract

The headline inflation in Saudi Arabia is subject to dramatic changes caused by new policies as the economy is undergoing structural changes since 2016. These changes could mislead policymakers as the underlying inflation may differ from the headline one. Since the announcement of Saudi Vision 2030 in April 2016, the Saudi economy entered a new era where the government has started to reform the economy to reduce its dependence on oil. As a result, many initiatives have been implemented with different impacts on the headline inflation such as imposing new taxes and expat levies and reforming energy prices. This research aims to calculate the core inflation in Saudi Arabia using two different methods: Trimmed Mean, and Median CPI. These two different methods were assessed based on their ability to track trends in the headline inflation over time as measured by the root mean square error and it ability to predict the future headline inflation.

Influence of Inflation on the Economic Growth of Saudi Arabia

“…Inflation, when it occurs at a modest rate, is generally seen as a normal consequence of economic expansion. However, if inflation becomes excessive and unpredictable, it can have negative impacts on investment choices, the buying power of consumers, and the overall stability of the economy (Alsabban et al, 2023) [3]. Hence, it is crucial to undertake a thorough examination of the impact of inflation on the economic development of Saudi Arabia, as this can provide detailed insights into policy-making and strategic economic planning for the nation.…”