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Are Core Inflation Directional Forecasts Informative?

  • Tito Nícias Teixeira da Silva Filho

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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File URL: http://www.bcb.gov.br/pec/wps/ingl/wps266.pdf
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Paper provided by Central Bank of Brazil, Research Department in its series Working Papers Series with number 266.

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Date of creation: Jan 2012
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Handle: RePEc:bcb:wpaper:266
Contact details of provider: Web page: http://www.bcb.gov.br/?english

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  1. James Bullard, 2011. "Measuring inflation: the core is rotten," Review, Federal Reserve Bank of St. Louis, issue July, pages 223-234.
  2. 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, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil), vol. 65(2), May.
  3. Kevin Clinton, 2006. "Core inflation at the Bank of Canada: A critique," Working Papers 1077, Queen's University, Department of Economics.
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