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A comparison of measures of core inflation

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  • Robert W. Rich
  • Charles Steindel

Abstract

The ability of central banks to differentiate between permanent and transitory price movements is critical for the conduct of monetary policy. The importance of gauging the persistence of price changes in a timely manner has led to the development of measures of underlying, or “core,” inflation that are designed to remove transitory price changes from aggregate inflation data. Given the usefulness of this information to policymakers, there is a surprising lack of consensus on a preferred measure of U.S. core inflation. This article examines several proposed measures of core inflation—the popular ex food and energy series, an ex energy series, a weighted median series, and an exponentially smoothed series—to identify a “best” measure. The authors evaluate the measures’ performance according to criteria such as ease of design and accuracy in tracking trend inflation, as well as explanatory content for within-sample and out-of-sample movements in aggregate CPI and PCE inflation. The study reveals that the candidate series perform very differently across aggregate inflation measures, criteria, and sample periods. The authors therefore find no compelling evidence to focus on one particular measure of core inflation, including the series that excludes food and energy prices. They attribute their results to the design of the individual measures and the measures’ inability to account for variability in the nature and sources of transitory price movements.

Suggested Citation

  • Robert W. Rich & Charles Steindel, 2007. "A comparison of measures of core inflation," Economic Policy Review, Federal Reserve Bank of New York, issue Dec, pages 19-38.
  • Handle: RePEc:fip:fednep:y:2007:i:dec:p:19-38:n:v.13no.3
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Verbrugge, Randal & Higgins, Amy, 2015. "Tracking Trend Inflation: Nonseasonally Adjusted Variants of the Median and Trimmed-Mean CPI," Working Paper 1527, Federal Reserve Bank of Cleveland.
    2. Hernando Vargas & Andrés González & Eliana González & José Vicente Romero & José Luis Eduardo Rojas, 2010. "Assessing inflationary pressures in Colombia," BIS Papers chapters,in: Bank for International Settlements (ed.), Monetary policy and the measurement of inflation: prices, wages and expectations, volume 49, pages 129-171 Bank for International Settlements.
    3. Mazumder, Sandeep, 2017. "Output gains from accelerating core inflation," Journal of Macroeconomics, Elsevier, vol. 51(C), pages 63-74.
    4. repec:bok:journl:v:18:y:2012:i:2:p:1-28 is not listed on IDEAS
    5. Bermingham, Colin, 2010. "A critical assessment of existing estimates of US core inflation," Journal of Macroeconomics, Elsevier, vol. 32(4), pages 993-1007, December.
    6. Stefano Siviero & Giovanni Veronese, 2011. "A policy-sensible benchmark core inflation measure," Oxford Economic Papers, Oxford University Press, vol. 63(4), pages 648-672, December.
    7. James Dolmas, 2009. "Excluding items from personal consumption expenditures inflation," Staff Papers, Federal Reserve Bank of Dallas, issue Jun.
    8. James B. Bullard, 2011. "Measuring inflation: the core is rotten," Review, Federal Reserve Bank of St. Louis, issue July, pages 223-234.
    9. Jim Lee, 2009. "Food and Energy Prices in Core Inflation," Economics Bulletin, AccessEcon, vol. 29(2), pages 847-860.
    10. James P Walsh, 2011. "Reconsidering the Role of Food Prices in Inflation," IMF Working Papers 11/71, International Monetary Fund.
    11. Sahu, Priyanka, 2018. "The Impact of Shocks on Core Inflation; Evidence from India," MPRA Paper 86588, University Library of Munich, Germany.
    12. Mazumder, Sandeep, 2014. "The sacrifice ratio and core inflation," Journal of Macroeconomics, Elsevier, vol. 40(C), pages 400-421.
    13. Stefano Eusepi & Bart Hobijn & Andrea Tambalotti, 2011. "CONDI: A Cost-of-Nominal-Distortions Index," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(3), pages 53-91, July.
    14. 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.).
    15. James Dolmas & Mark A. Wynne, 2008. "Measuring core inflation: notes from a 2007 Dallas Fed conference," Staff Papers, Federal Reserve Bank of Dallas, issue May.
    16. Alan K. Detmeister, 2012. "What should core inflation exclude?," Finance and Economics Discussion Series 2012-43, Board of Governors of the Federal Reserve System (U.S.).
    17. Terence C. Mills, 2013. "Constructing U.K. Core Inflation," Econometrics, MDPI, Open Access Journal, vol. 1(1), pages 1-21, April.

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