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PCE and CPI inflation differentials: converting inflation forecasts

  • Craig S. Hakkio
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    The Federal Reserve recently announced it will begin to release quarterly inflation forecasts based on the Personal Consumption Expenditure Price Index. As Chairman Bernanke said, the PCE index is generally thought to be ?the single most comprehensive and theoretically compelling measure of consumer prices.? At the same time, Bernanke said that ?no single measure of inflation is perfect, and the Committee will continue to monitor a range of measures when forming its view about inflation prospects,? including the Consumer Price Index. ; The public and private sectors alike will want to be able to convert CPI inflation forecasts released by various organizations to PCE inflation forecasts, and vice versa. But the inflation differentials for the two measures can change significantly over time. To convert between CPI and PCE inflation projections, economists must construct statistical models to explain and predict the inflation differentials (overall and core), recognizing that the differentials may change over time. ; Hakkio estimates a set of models that analysts can use to make such conversions.

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    Article provided by Federal Reserve Bank of Kansas City in its journal Economic Review.

    Volume (Year): (2008)
    Issue (Month): Q I ()
    Pages: 51-68

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    Handle: RePEc:fip:fedker:y:2008:i:qi:p:51-68:n:v.93no.1
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    1. Todd E. Clark & Michael W. McCracken, 2008. "Improving forecast accuracy by combining recursive and rolling forecasts," Working Papers 2008-028, Federal Reserve Bank of St. Louis.
    2. Todd E. Clark, 1999. "A comparison of the CPI and the PCE price index," Economic Review, Federal Reserve Bank of Kansas City, issue Q III, pages 15-29.
    3. Clinton P. McCully & Brian C. Moyer & Kenneth J. Stewart, 2007. "A Reconciliation between the Consumer Price Index and the Personal Consumption Expenditures Price Index," BEA Papers 0079, Bureau of Economic Analysis.
    4. 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.
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