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How Well Does “Core” Inflation Capture Permanent Price Changes?

Author

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  • Bradley, Michael D.
  • Jansen, Dennis W.
  • Sinclair, Tara M.

Abstract

Does excluding food and energy prices from the Consumer Price Index (CPI) produce a measure that better captures permanent price changes? To examine this question, we decompose CPI inflation and “core” inflation into their permanent and transitory components, using a correlated unobserved-components model. The stationarity of inflation may be time-varying, so we examine the performance of the core measure of inflation separately for periods in which inflation is I(1) and I(0). For a period in which inflation appears to be I(1), we find that core inflation and the permanent component of overall inflation are closely related, but there are some caveats. For a period in which inflation appears to be I(0), we decompose the core and overall price levels and find that the permanent component of the core CPI is much more volatile than the actual core series and that the core excludes volatile permanent shocks to the overall price level.

Suggested Citation

  • Bradley, Michael D. & Jansen, Dennis W. & Sinclair, Tara M., 2015. "How Well Does “Core” Inflation Capture Permanent Price Changes?," Macroeconomic Dynamics, Cambridge University Press, vol. 19(4), pages 791-815, June.
    • Handle: RePEc:cup:macdyn:v:19:y:2015:i:04:p:791-815_00
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Links for 05-29-2013
      by Mark Thoma in Economist's View on 2013-05-29 05:03:00

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    Cited by:

    1. Yao, Yao & Ivanovski, Kris & Inekwe, John & Smyth, Russell, 2019. "Human capital and energy consumption: Evidence from OECD countries," Energy Economics, Elsevier, vol. 84(C).
    2. Giri, Federico, 2022. "The relationship between headline, core, and energy inflation: A wavelet investigation," Economics Letters, Elsevier, vol. 210(C).
    3. Ferreira, Pedro Costa & Mattos, Daiane Marcolino de & Ardeo, Vagner Laerte, 2017. "Triple-Filter core inflation: a measure of the inflation trajectory," Revista Brasileira de Economia - RBE, EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil), vol. 71(4), December.
    4. Myers, Robert J. & Johnson, Stanley R. & Helmar, Michael & Baumes, Harry, 2018. "Long-run and short-run relationships between oil prices, producer prices, and consumer prices: What can we learn from a permanent-transitory decomposition?," The Quarterly Review of Economics and Finance, Elsevier, vol. 67(C), pages 175-190.
    5. James Morley & Irina B. Panovska & Tara M. Sinclair, 2014. "Testing Stationarity for Unobserved Components Models," Discussion Papers 2012-41B, School of Economics, The University of New South Wales.

    More about this item

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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