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PCE inflation and core inflation

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  • Julie K. Smith

Abstract

This paper investigates the forecasting accuracy of the trimmed mean inflation rate of the Personal Consumption Expenditure (PCE) deflator. Earlier works have examined the forecasting ability of limited-influence estimators (trimmed means and the weighted median) of the Consumer Price Index but none have compared the weighted median and trimmed mean of the PCE. Also addressed is the systematic bias that appears due to the differences in the means of inflation measures over the sample. This paper supports earlier results that limited-influence estimators provide better forecasts of future inflation than does the popular measure of core inflation, PCE inflation minus food and energy; therefore, these limited-influence estimators are core inflation.

Suggested Citation

  • Julie K. Smith, 2012. "PCE inflation and core inflation," Working Papers 1203, Federal Reserve Bank of Dallas.
    • Handle: RePEc:fip:feddwp:1203
    DOI: 10.24149/wp1203
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    References listed on IDEAS

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    1. Freeman, Donald G., 1998. "Do core inflation measures help forecast inflation?," Economics Letters, Elsevier, vol. 58(2), pages 143-147, February.
    2. Laurence Ball & N. Gregory Mankiw, 1995. "Relative-Price Changes as Aggregate Supply Shocks," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 110(1), pages 161-193.
    3. Jim Dolmas, 2005. "Trimmed mean PCE inflation," Working Papers 0506, Federal Reserve Bank of Dallas.
    4. Robert W. Rich & Charles Steindel, 2005. "A review of core inflation and an evaluation of its measures," Staff Reports 236, Federal Reserve Bank of New York.
    5. Julie Smith, 2005. "Inflation targeting and core inflation," Canadian Journal of Economics, Canadian Economics Association, vol. 38(3), pages 1018-1036, August.
    6. Harvey, David & Leybourne, Stephen & Newbold, Paul, 1997. "Testing the equality of prediction mean squared errors," International Journal of Forecasting, Elsevier, vol. 13(2), pages 281-291, June.
    7. Smith, Julie K, 2004. "Weighted Median Inflation: Is This Core Inflation?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(2), pages 253-263, April.
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    Cited by:

    1. Dowd, Kevin & Cotter, John & Loh, Lixia, 2011. "U.S. Core Inflation: A Wavelet Analysis," Macroeconomic Dynamics, Cambridge University Press, vol. 15(4), pages 513-536, September.
    2. Jose Luis Nolazco & Pablo Pincheira & Jorge Selaive, 2016. "The evasive predictive ability of core inflation," Working Papers 15/34, BBVA Bank, Economic Research Department.
    3. Aleksandra Hałka & Grzegorz Szafrański, 2018. "What core inflation indicators measure?," NBP Working Papers 294, Narodowy Bank Polski.
    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. James B. Bullard, 2011. "Measuring inflation: the core is rotten," Review, Federal Reserve Bank of St. Louis, vol. 93(July), pages 223-234.
    6. Pincheira-Brown, Pablo & Selaive, Jorge & Nolazco, Jose Luis, 2019. "Forecasting inflation in Latin America with core measures," International Journal of Forecasting, Elsevier, vol. 35(3), pages 1060-1071.

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    Keywords

    Price levels; Forecasting;

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