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Short-term headline-core inflation dynamics

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  • Yash P. Mehra
  • Devin Reilly
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    Abstract

    This article investigates empirically short-term dynamics between headline and core measures of consumer price index and personal consumption expenditure inflation over three sample periods: 1959:1-1979:1, 1979:2-2001:2, and 1985:1-2007:2. Headline and core inflation measures are co-integrated, suggesting long-run co-movement. However, the ways these two variables adjust to each other in the short run and generate co-movement have changed across these sample periods. In the pre-1979 sample period, when a positive gap opens up with headline inflation rising above core inflation, the gap is eliminated mainly as a result of headline inflation not reverting and core inflation moving toward headline inflation. These dynamics suggest headline inflation would be better than core inflation in assessing the permanent component of inflation. In post-1979 sample periods, however, the positive gap is eliminated as a result of headline inflation reverting more strongly toward core inflation than core inflation moving toward headline inflation, suggesting core inflation would be better than headline inflation in assessing the permanent component of inflation. This change in headline-core inflation dynamics may be due to the Federal Reserve having convinced the public it would no longer accommodate shocks to food and energy prices.

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    File URL: http://www.richmondfed.org/publications/research/economic_quarterly/2009/summer/pdf/mehra.pdf
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    Bibliographic Info

    Article provided by Federal Reserve Bank of Richmond in its journal Economic Quarterly.

    Volume (Year): (2009)
    Issue (Month): Sum ()
    Pages: 289-313

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    Handle: RePEc:fip:fedreq:y:2009:i:sum:p:289-313:n:v.95no.3

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    Keywords: Inflation (Finance) ; Monetary policy;

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    1. Granger, Clive W J, 1986. "Developments in the Study of Cointegrated Economic Variables," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 48(3), pages 213-28, August.
    2. Thomas A. Lubik & Paolo Surico, 2006. "The Lucas critique and the stability of empirical models," Working Paper 06-05, Federal Reserve Bank of Richmond.
    3. Alan S. Blinder & Ricardo Reis, 2005. "Understanding the Greenspan Standard," Working Papers 88, Princeton University, Department of Economics, Center for Economic Policy Studies..
    4. Michael T. Kiley, 2008. "Estimating the common trend rate of inflation for consumer prices and consumer prices excluding food and energy prices," Finance and Economics Discussion Series 2008-38, Board of Governors of the Federal Reserve System (U.S.).
    5. Robert Rich & Charles Steindel, 2005. "A review of core inflation and an evaluation of its measures," Staff Reports 236, Federal Reserve Bank of New York.
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