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Time-series measures of core inflation

Author

Listed:
  • Edward N. Gamber

    (Congressional Budget Office)

  • Julie K. Smith

    (Lafayette College)

Abstract

Most papers examining the measurement of core inflation, such as the weighted median, have focused on cross-section information in the disaggregated inflation data. This paper improves on the literature by introducing new measures, based on a definition of core inflation as the best predictor of future inflation that exploits the time-series information in the disaggregated inflation data. Exploiting the time-series information in disaggregated or component inflation data produces better forecasts. Additionally, the best new measure comes from jointly estimating the optimal weights instead of imposing weights based on the persistence of the components or the underlying factors estimated by principal components.

Suggested Citation

  • Edward N. Gamber & Julie K. Smith, 2016. "Time-series measures of core inflation," Working Papers 2016-008, The George Washington University, Department of Economics, H. O. Stekler Research Program on Forecasting.
    • Handle: RePEc:gwc:wpaper:2016-008
    as

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    File URL: https://www2.gwu.edu/~forcpgm/2016-008.pdf
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    References listed on IDEAS

    as
    1. Michael Pedersen, 2009. "An Alternative Core Inflation Measure," German Economic Review, Verein für Socialpolitik, vol. 10(2), pages 139-164, May.
    2. Colin Bermingham & Antonello D’Agostino, 2014. "Understanding and forecasting aggregate and disaggregate price dynamics," Empirical Economics, Springer, vol. 46(2), pages 765-788, March.
    3. Luca Benati, 2008. "Investigating Inflation Persistence Across Monetary Regimes," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 123(3), pages 1005-1060.
    4. Bagliano, Fabio C. & Morana, Claudio, 2003. "Measuring US core inflation: A common trends approach," Journal of Macroeconomics, Elsevier, vol. 25(2), pages 197-212, June.
    5. José R. Maria, 2004. "On the Use of the First Principal Component as a Core Inflation Indicator," Working Papers w200403, Banco de Portugal, Economics and Research Department.
    6. Michael F. Bryan & Stephen G. Cecchetti, 1994. "Measuring Core Inflation," NBER Chapters, in: Monetary Policy, pages 195-219, National Bureau of Economic Research, Inc.
    7. Hendry, David F. & Hubrich, Kirstin, 2011. "Combining Disaggregate Forecasts or Combining Disaggregate Information to Forecast an Aggregate," Journal of Business & Economic Statistics, American Statistical Association, vol. 29(2), pages 216-227.
    8. Franck Sédillot & Hervé Le Bihan, 2002. "Implementing and interpreting indicators of core inflation: the case of France," Empirical Economics, Springer, vol. 27(3), pages 473-497.
    9. Juan-Luis Vega & Mark A. Wynne, 2003. "A First Assessment of Some Measures of Core Inflation for the Euro Area," German Economic Review, Verein für Socialpolitik, vol. 4, pages 269-306, August.
    10. Hubrich, Kirstin, 2005. "Forecasting euro area inflation: Does aggregating forecasts by HICP component improve forecast accuracy?," International Journal of Forecasting, Elsevier, vol. 21(1), pages 119-136.
    11. Edward N. Gamber & Jeffrey P. Liebner & Julie K. Smith, 2016. "Inflation persistence: revisited," International Journal of Monetary Economics and Finance, Inderscience Enterprises Ltd, vol. 9(1), pages 25-44.
      • Edward N. Gamber & Jeffrey P. Liebner & Julie K. Smith, 2013. "Inflation Persistence: Revisited," Working Papers 2013-002, The George Washington University, Department of Economics, H. O. Stekler Research Program on Forecasting.
    12. 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.).
    13. Theodore M. Crone & N. Neil K. Khettry & Loretta J. Mester & Jason A. Novak, 2013. "Core Measures of Inflation as Predictors of Total Inflation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(2‐3), pages 505-519, March.
    14. 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.
    15. repec:mcb:jmoncb:v:45:y:2013:i::p:505-519 is not listed on IDEAS
    16. Nicoletta Batini, 2006. "Euro area inflation persistence," Empirical Economics, Springer, vol. 31(4), pages 977-1002, November.
    17. Michael Pedersen, 2009. "An Alternative Core Inflation Measure," German Economic Review, Verein für Socialpolitik, vol. 10(2), pages 139-164, May.
    18. 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.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Core inflation; inflation; forecasting; disaggregated components; principal components;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications

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