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Are Core Inflation Directional Forecasts Informative?

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  • Tito Nícias Teixeira da Silva Filho

Abstract

Core inflation is under attack. Empirically, experts have become increasingly disappointed with its actual performance. Theoretically, while some claim that it is a key inflation predictor others argue that, by construction, that cannot be one of its main properties, at least in the short run. Even if true, core inflation could still be useful if it provides good directional inflation forecasts. The evidence presented here using U.S., Canadian and Brazilian data shows that this does not seem to be the case. Directional forecasts are often no better than a coin toss, especially from the level model. The gap model’s forecasts are wrong, on average, at least 20% of the time. More crucially, they are usually no better than a simple moving average of headline inflation.

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  • Tito Nícias Teixeira da Silva Filho, 2012. "Are Core Inflation Directional Forecasts Informative?," Working Papers Series 266, Central Bank of Brazil, Research Department.
    • Handle: RePEc:bcb:wpaper:266
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    1. da Silva Filho, Tito Nícias Teixeira & Figueiredo, Francisco Marcos Rodrigues, 2011. "Has Core Inflation Been Doing a Good Job in Brazil?," Revista Brasileira de Economia - RBE, EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil), vol. 65(2), June.
    2. Alan S. Blinder, 2006. "Monetary Policy Today: Sixteen Questions and about Twelve Answers," Working Papers 73, Princeton University, Department of Economics, Center for Economic Policy Studies..
    3. James B. Bullard, 2011. "Measuring inflation: the core is rotten," Review, Federal Reserve Bank of St. Louis, vol. 93(July), pages 223-234.
    4. Kevin Clinton, 2006. "Core Inflation At The Bank Of Canada: A Critique," Working Paper 1077, Economics Department, Queen's University.
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