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How Useful is Core Inflation for Forecasting Headline Inflation?

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  • Colin Bermingham

    (Central Bank and Financial Services Authority of Ireland, Dublin)

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    Abstract

    The paper constructs various core inflation measures. These include various trimmed means using disaggregated data and a structural VAR estimate of core inflation for Ireland. The ability of these core inflation measures to forecast future headline inflation is compared using a regression model. An ARIMA model fitted to the headline inflation rate is used as the benchmark forecast. The forecasts from the ARIMA model are most accurate over short time horizons for monthly data. The structural VAR based estimate is most accurate over longer time horizons. For quarterly data, the structural VAR provides the optimal forecast over all time horizons.

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    File URL: http://www.esr.ie/Vol38_3/04%20Vol%2038%20Bermingham.pdf
    File Function: First version, 2007
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    Article provided by Economic and Social Studies in its journal Economic and Social Review.

    Volume (Year): 38 (2007)
    Issue (Month): 3 ()
    Pages: 355–377

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    Handle: RePEc:eso:journl:v:38:y:2007:i:3:p:355-377
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    1. Blanchard, Olivier Jean & Quah, Danny, 1989. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," American Economic Review, American Economic Association, vol. 79(4), pages 655-73, September.
    2. Todd E. Clark, 2001. "Comparing measures of core inflation," Economic Review, Federal Reserve Bank of Kansas City, issue Q II, pages 5-31.
    3. Hilde C. Bjørnland, 2000. "Identifying Domestic and Imported Core Inflation," IMF Working Papers 00/4, International Monetary Fund.
    4. Meyler, Aidan, 1999. "A statistical measure of core inflation," MPRA Paper 11362, University Library of Munich, Germany.
    5. Stephen G. Cecchetti, 1997. "Measuring short-run inflation for central bankers," Review, Federal Reserve Bank of St. Louis, issue May, pages 143-155.
    6. Hogan, Seamus & Marianne Johnson & Thérèse Laflèche, 2001. "Core Inflation," Technical Reports 89, Bank of Canada.
    7. Claus, I., 1997. "A Measure of Underlying Inflation in the United States," Working Papers 97-20, Bank of Canada.
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    Cited by:

    1. Bermingham, Colin, 2008. "Quantifying the Impact of Oil Prices on Inflation," Research Technical Papers 8/RT/08, Central Bank of Ireland.

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