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A Measure of Underlying Inflation in the United States

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  • Claus, I.

Abstract

A monetary authority with the primary objective of price stability has to distinguish between temporary price shocks and persistent shocks to the rate of inflation. A measure of underlying inflation, therefore, has an important role to play as a guideline for monetary policy. In this paper, a measure of underlying inflation in the United States is obtained using a structural vector autoregressive (SVAR) methodology. The assumption that movements in measured inflation are the result of (a) one-time shocks to prices arising from supply-side developments and (b) persistent shocks to the inflation rate arising from demand-side developments provides a set of long-run restrictions to identify the structural innovations to the consumer price inflation rate. The model is estimated with monthly data and includes consumer prices (CPI), capacity utilization (CAPUT), producer prices of finished consumer goods (PPI), and import prices (IMP). The evidence reported in this paper suggests that measured inflation in the United States was below its underlying trend rate in 1994 and 1995, a period when inflationary pressures remained subdued, despite above-potential growth and labour market tightness. The evidence also supports the view that temporary factors have helped to contain inflationary tendencies in recent years. Past shocks should exert some further downward pressure on the inflation rate. Moreover, we find that the tightening in 1994­95 coincided with an upward trend in the underlying inflation rate, while measured inflation was still trending downward. The finding supports the view that the Federal Reserve reacts to movements in the underlying trend inflation rate.

Suggested Citation

  • Claus, I., 1997. "A Measure of Underlying Inflation in the United States," Staff Working Papers 97-20, Bank of Canada.
  • Handle: RePEc:bca:bocawp:97-20
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    Citations

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    Cited by:

    1. Mark A. Wynne, 2008. "Core inflation: a review of some conceptual issues," Review, Federal Reserve Bank of St. Louis, issue May, pages 205-228.
    2. Pascal Jacquinot, 2001. "L'inflation sous-jacente en France, en Allemagne et Royaume-Uni," Economie & Prévision, La Documentation Française, vol. 147(1), pages 171-185.
    3. Ghrissi Mhamdi & Mounir Smida & Ramzi Farhani, 2014. "Indicators of core inflation: Case of Tunisia," Post-Print halshs-01138432, HAL.
    4. Jamie Armour, 2006. "An Evaluation of Core Inflation Measures," Staff Working Papers 06-10, Bank of Canada.
    5. Sohei Kaihatsu & Jouchi Nakajima, 2015. "Has Trend Inflation Shifted?: An Empirical Analysis with a Regime-Switching Model," Bank of Japan Working Paper Series 15-E-3, Bank of Japan.
    6. Scott Roger, 1998. "Core inflation: concepts, uses and measurement," Reserve Bank of New Zealand Discussion Paper Series G98/9, Reserve Bank of New Zealand.
    7. C.K. Folkertsma & K. Hubrich, 2000. "Performance of core inflation measures," WO Research Memoranda (discontinued) 639, Netherlands Central Bank, Research Department.
    8. Luis J. Álvarez & María de los Llanos Matea, 1999. "Underlying Inflation Measures in Spain," Working Papers 9911, Banco de España;Working Papers Homepage.
    9. Martha Misas A>rango & Enrique López Enciso & Juana Téllez Corredor & José Fernando Escobar Restrepo, 2005. "La Inflación Subyacente En Colombia: Un Enfoque De Tendencias Estocásticas Comunes Asociadas A Un Vec Estructural," BORRADORES DE ECONOMIA 003026, BANCO DE LA REPÚBLICA.
    10. Mark S Astley & Tony Yates, 1999. "Inflation and real disequilibria," Bank of England working papers 103, Bank of England.
    11. Landau, Bettina, 2000. "Core inflation rates: a comparison of methods based on west German data," Discussion Paper Series 1: Economic Studies 2000,04, Deutsche Bundesbank.
    12. Colin Bermingham, 2007. "How Useful is Core Inflation for Forecasting Headline Inflation?," The Economic and Social Review, Economic and Social Studies, vol. 38(3), pages 355-377.
    13. Bermingham, Colin, 2006. "How Useful is Core Inflation for Forecasting Headline Inflation?," Research Technical Papers 11/RT/06, Central Bank of Ireland.

    More about this item

    Keywords

    Inflation and prices; International topics;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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