Inflation is one of the most important indicators of macroeconomic stability. It also affects welfare and serves as a goal to public policy. Sincethe flotation of the pound in 2003, the Egyptian economy has been subject to waves of relatively high increases in prices. During each of these waves, a heated debate occurred about the accuracy of the official inflation rates in reflecting actual changes in prices. Most Egyptians, whether economists or not, would argue that the Consumer Price Index (CPI) underestimates actual increases in prices and, therefore, under-mines living standards in Egypt. At the same time, the Central Bank of Egypt (CBE) has announced its intention to shift to an inflation targeting (IT) framework that aims to achieve price stability. 2 Since a target for inflation should then be set and sought by the monetary authorities, the use of an accurate and adequate measure of inflation becomes imperative. The motivation for this study also comes from the concern that the absence of a reliable and accurate measurement of inflation may lead to distortion of policy decisions and complications in macroeconomic man-agement. Since inflation is a central guide to consumption and investment decisions, an inaccurate measure of inflation could hinder the efficient allocation of resources in a market economy (Greenspan 1997). Furthermore, inadequate measurement of inflation may also distort both short-and long-term policy decisions (Gordon 1992). For instance, an overstatement of the true rate of inflation can lead policymakers to adopt short-run restrictive policies when none may be required. In the long