To distinguish inflation signal from transient noise, monetary policymakers have long
used core inflation measures. Using disaggregate CPI data for Korea, this paper reviews
extant measures of core inflation and documents several important empirical features of the
measures. Our theoretical analysis demonstrates that the stylized facts on the extant measures
are not compatible with a single stochastic trend, and our empirical findings strongly
support this view. Motivated by price divergence, we model disaggregate prices in multiplecomponent
structure and find there are four persistent components together with a group of
diverging items. Having identified distinct common components, we employ a new core
inflation measure based on a limited influence estimator for each convergence club. The
new core inflation dominates the extant measures in its ability to account for central
tendency of price distribution and for generating low variance of price changes. In addition,
it forecasts the underlying trend of headline CPI inflation more accurately than the extant
core inflation indicators do.