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How Seasonality in Inflation Variance Affects Estimates of Underlying Inflation

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Abstract

The Federal Reserve has a mandate to achieve price stability, which it interprets as inflation that averages 2 percent over time. Retrospectively, it is simple to determine how successful the Fed has been in achieving this goal. In real time, however, a key challenge for the Fed is inferring the current level of "underlying" inflation, as that involves filtering out the noise from volatile monthly inflation data. In this article, we show that there is a seasonal aspect to the volatility of PCE inflation that makes it desirable (and important) to filter differently depending on the month of the year.

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  • Alexander L. Wolman, 2025. "How Seasonality in Inflation Variance Affects Estimates of Underlying Inflation," Richmond Fed Economic Brief, Federal Reserve Bank of Richmond, vol. 25(14), April.
    • Handle: RePEc:fip:fedreb:99816
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    File URL: https://www.richmondfed.org/publications/research/economic_brief/2025/eb_25-14
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    Keywords

    inflation; seasonality;

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