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The relationship between headline, core, and energy inflation: A wavelet investigation

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  • Giri, Federico

Abstract

This paper investigates if core inflation, the measure of price growth obtained excluding the more volatile items such as energy and food prices, is a good approximation of headline inflation that considers the entire bundle. Starting from the mid-90s, our answer is negative. From a monetary policy perspective, this raises the issue of whether controlling core inflation is still useful to anchor medium-run inflation. Using the wavelet methodology, our analysis suggests that starting from the end of the 90s core inflation is weakly correlated with headline inflation especially at the lower frequencies. Energy inflation is strongly correlated with headline inflation at a broad range of frequencies, casting doubt on its exclusion from a trend inflation measure.

Suggested Citation

  • Giri, Federico, 2022. "The relationship between headline, core, and energy inflation: A wavelet investigation," Economics Letters, Elsevier, vol. 210(C).
    • Handle: RePEc:eee:ecolet:v:210:y:2022:i:c:s0165176521004584
    DOI: 10.1016/j.econlet.2021.110214
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    References listed on IDEAS

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    1. Aguiar-Conraria, Luis & Martins, Manuel M.F. & Soares, Maria Joana, 2018. "Estimating the Taylor rule in the time-frequency domain," Journal of Macroeconomics, Elsevier, vol. 57(C), pages 122-137.
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    5. Michele Lenza, 2011. "Revisiting the information content of core inflation," Research Bulletin, European Central Bank, vol. 14, pages 11-13.
    6. Lawrence J. Christiano & Terry J. Fitzgerald, 2003. "The Band Pass Filter," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(2), pages 435-465, May.
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    Cited by:

    1. Carlomagno, Guillermo & Fornero, Jorge & Sansone, Andrés, 2023. "A proposal for constructing and evaluating core inflation measures," Latin American Journal of Central Banking (previously Monetaria), Elsevier, vol. 4(3).
    2. Andreani, Michele & Giri, Federico, 2023. "Not a short-run noise! The low-frequency volatility of energy inflation," Finance Research Letters, Elsevier, vol. 51(C).
    3. Mohammad Asif & Vishal Sharma & Vinay Joshi Chandniwala & Parvez Alam Khan & Syed Mohd Muneeb, 2023. "Modelling the Dynamic Linkage Amidst Energy Prices and Twin Deficit in India: Empirical Investigation within Linear and Nonlinear Framework," Energies, MDPI, vol. 16(6), pages 1-23, March.
    4. İbrahim Özmen & Şerife Özşahin, 2023. "Effects of global energy and price fluctuations on Turkey's inflation: new evidence," Economic Change and Restructuring, Springer, vol. 56(4), pages 2695-2728, August.

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    More about this item

    Keywords

    Headline inflation; Core inflation; Energy inflation; Wavelets; Medium-run;
    All these keywords.

    JEL classification:

    • E00 - Macroeconomics and Monetary Economics - - General - - - General
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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