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A comparison of measures of core inflation

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  • Robert Rich
  • Charles Steindel

Abstract

The ability of central banks to differentiate between permanent and transitory price movements is critical for the conduct of monetary policy. The importance of gauging the persistence of price changes in a timely manner has led to the development of measures of underlying, or “core,” inflation that are designed to remove transitory price changes from aggregate inflation data. Given the usefulness of this information to policymakers, there is a surprising lack of consensus on a preferred measure of U.S. core inflation. This article examines several proposed measures of core inflation—the popular ex food and energy series, an ex energy series, a weighted median series, and an exponentially smoothed series—to identify a “best” measure. The authors evaluate the measures’ performance according to criteria such as ease of design and accuracy in tracking trend inflation, as well as explanatory content for within-sample and out-of-sample movements in aggregate CPI and PCE inflation. The study reveals that the candidate series perform very differently across aggregate inflation measures, criteria, and sample periods. The authors therefore find no compelling evidence to focus on one particular measure of core inflation, including the series that excludes food and energy prices. They attribute their results to the design of the individual measures and the measures’ inability to account for variability in the nature and sources of transitory price movements.

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Bibliographic Info

Article provided by Federal Reserve Bank of New York in its journal Economic Policy Review.

Volume (Year): (2007)
Issue (Month): Dec ()
Pages: 19-38

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Handle: RePEc:fip:fednep:y:2007:i:dec:p:19-38:n:v.13no.3

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Keywords: Price indexes ; Economic indicators ; Inflation (Finance);

References

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  1. Smith, Julie K, 2004. "Weighted Median Inflation: Is This Core Inflation?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(2), pages 253-63, April.
  2. Alan S. Blinder & Ricardo Reis, 2005. "Understanding the Greenspan standard," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, issue Aug, pages 11-96.
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  7. Cogley, Timothy, 2002. "A Simple Adaptive Measure of Core Inflation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(1), pages 94-113, February.
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  10. Aoki, Kosuke, 2001. "Optimal monetary policy responses to relative-price changes," Journal of Monetary Economics, Elsevier, vol. 48(1), pages 55-80, August.
  11. Todd E. Clark, 2001. "Comparing measures of core inflation," Economic Review, Federal Reserve Bank of Kansas City, issue Q II, pages 5-31.
  12. Michael Dotsey & Thomas Stark, 2005. "The relationship between capacity utilization and inflation," Business Review, Federal Reserve Bank of Philadelphia, issue Q2, pages 8-17.
  13. Marianne Baxter & Robert G. King, 1999. "Measuring Business Cycles: Approximate Band-Pass Filters For Economic Time Series," The Review of Economics and Statistics, MIT Press, vol. 81(4), pages 575-593, November.
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  15. Hogan, Seamus & Marianne Johnson & Thérèse Laflèche, 2001. "Core Inflation," Technical Reports 89, Bank of Canada.
  16. Joanne Cutler, 2001. "Core Inflation in the UK," Discussion Papers 03, Monetary Policy Committee Unit, Bank of England.
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  18. Jim Dolmas, 2005. "Trimmed mean PCE inflation," Working Papers 0506, Federal Reserve Bank of Dallas.
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Citations

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Cited by:
  1. James Bullard, 2011. "Measuring inflation: the core is rotten," Speech 180, Federal Reserve Bank of St. Louis.
  2. Jim Dolmas & Mark A. Wynne, 2008. "Measuring core inflation: notes from a 2007 Dallas Fed conference," Staff Papers, Federal Reserve Bank of Dallas, issue May.
  3. Alan K. Detmeister, 2011. "The usefulness of core PCE inflation measures," Finance and Economics Discussion Series 2011-56, Board of Governors of the Federal Reserve System (U.S.).
  4. Stefano Siviero & Giovanni Veronese, 2011. "A policy-sensible benchmark core inflation measure," Oxford Economic Papers, Oxford University Press, vol. 63(4), pages 648-672, December.
  5. Hernando Vargas & Andrés González & Eliana González & José Vicente Romero & José Luis Eduardo Rojas, 2010. "Assessing inflationary pressures in Colombia," BIS Papers chapters, in: Bank for International Settlements (ed.), Monetary policy and the measurement of inflation: prices, wages and expectations, volume 49, pages 129-171 Bank for International Settlements.
  6. Alan K. Detmeister, 2012. "What should core inflation exclude?," Finance and Economics Discussion Series 2012-43, Board of Governors of the Federal Reserve System (U.S.).
  7. Stefano Eusepi & Bart Hobijn & Andrea Tambalotti, 2009. "CONDI: a cost-of-nominal-distortions index," Staff Reports 367, Federal Reserve Bank of New York.
  8. Jim Lee, 2009. "Food and Energy Prices in Core Inflation," Economics Bulletin, AccessEcon, vol. 29(2), pages 847-860.
  9. Mazumder, Sandeep, 2014. "The sacrifice ratio and core inflation," Journal of Macroeconomics, Elsevier, vol. 40(C), pages 400-421.
  10. Bermingham, Colin, 2010. "A critical assessment of existing estimates of US core inflation," Journal of Macroeconomics, Elsevier, vol. 32(4), pages 993-1007, December.
  11. Terence C. Mills, 2013. "Constructing U.K. Core Inflation," Econometrics, MDPI, Open Access Journal, vol. 1(1), pages 32-52, April.
  12. James P Walsh, 2011. "Reconsidering the Role of Food Prices in Inflation," IMF Working Papers 11/71, International Monetary Fund.
  13. Jim Dolmas, 2009. "Excluding items from personal consumption expenditures inflation," Staff Papers, Federal Reserve Bank of Dallas, issue Jun.
  14. Wojciech Charemza & Yuriy Kharin & Vladislav Maevskiy, 2012. "Bilinear forecast risk assessment for non-systematic inflation: Theory and evidence," Discussion Papers in Economics 12/22, Department of Economics, University of Leicester.

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