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What should core inflation exclude?

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  • Alan K. Detmeister
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    Abstract

    Consumer price inflation excluding food and energy often performs worse than other measures of underlying inflation in out-of-sample tests of predicting future inflation or tracking an ex-post measure of underlying trend inflation. Nonetheless, inflation excluding food and energy remains popular for its simplicity and transparency. Would excluding different items improve performance while maintaining the simplicity and transparency? Unfortunately, probably not. Averaging across a series of tests suggests that knowing what items to exclude before seeing the data is problematic and excluding food and energy is not a bad ex-ante guess. However, ex-post it is not difficult to construct an index which performs considerably better than excluding food and energy.

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    Bibliographic Info

    Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2012-43.

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    Date of creation: 2012
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    Handle: RePEc:fip:fedgfe:2012-43

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    1. Hogan, Seamus & Marianne Johnson & Thérèse Laflèche, 2001. "Core Inflation," Technical Reports 89, Bank of Canada.
    2. 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.
    3. Michael Pedersen, 2009. "An Alternative Core Inflation Measure," German Economic Review, Verein für Socialpolitik, vol. 10, pages 139-164, 05.
    4. Freeman, Donald G., 1998. "Do core inflation measures help forecast inflation?," Economics Letters, Elsevier, vol. 58(2), pages 143-147, February.
    5. Brent Meyer & Mehmet Pasaogullari, 2010. "Simple ways to forecast inflation: what works best?," Economic Commentary, Federal Reserve Bank of Cleveland, issue Dec.
    6. Jim Dolmas, 2009. "Excluding items from personal consumption expenditures inflation," Staff Papers, Federal Reserve Bank of Dallas, issue Jun.
    7. Robert Rich & Charles Steindel, 2007. "A comparison of measures of core inflation," Economic Policy Review, Federal Reserve Bank of New York, issue Dec, pages 19-38.
    8. Robalo Marques, Carlos & Duarte Neves, Pedro & Morais Sarmento, Luis, 2003. "Evaluating core inflation indicators," Economic Modelling, Elsevier, vol. 20(4), pages 765-775, July.
    9. 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.
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