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How Useful is Core Inflation for Forecasting Headline Inflation?

Author

Listed:
  • Bermingham, Colin

    (Central Bank and Financial Services Authority of Ireland)

Abstract

The paper constructs various core inflation measures. These include various trimmed means using highly disaggregated data and a structural VAR estimate of core inflation for Ireland. The ability of these core inflation measures to forecast future headline inflation is compared using a simple regression model. An ARIMA model fitted to the headline inflation rate is used to construct the benchmark forecast. The forecasts from the ARIMA model are most accurate over short time horizons for monthly data. The structural VAR based estimate is most accurate over longer time horizons. For quarterly data, the structural VAR provides the optimal forecast over all time horizons considered.

Suggested Citation

  • Bermingham, Colin, 2006. "How Useful is Core Inflation for Forecasting Headline Inflation?," Research Technical Papers 11/RT/06, Central Bank of Ireland.
  • Handle: RePEc:cbi:wpaper:11/rt/06
    as

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    File URL: https://centralbank.ie/docs/default-source/publications/research-technical-papers/11rt06---how-useful-is-core-inflation-for-forecasting-headline-inflation-(bermingham).pdf?sfvrsn=4
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    References listed on IDEAS

    as
    1. Blanchard, Olivier Jean & Quah, Danny, 1989. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," American Economic Review, American Economic Association, vol. 79(4), pages 655-673, September.
    2. Quah, Danny & Vahey, Shaun P, 1995. "Measuring Core Inflation?," Economic Journal, Royal Economic Society, vol. 105(432), pages 1130-1144, September.
    3. Hogan, Seamus & Marianne Johnson & Thérèse Laflèche, 2001. "Core Inflation," Technical Reports 89, Bank of Canada.
    4. Meyler, Aidan, 1999. "A statistical measure of core inflation," MPRA Paper 11362, University Library of Munich, Germany.
    5. Scott Roger, 1998. "Core inflation: concepts, uses and measurement," Reserve Bank of New Zealand Discussion Paper Series G98/9, Reserve Bank of New Zealand.
    6. Jonathan Kearns, 1998. "The Distribution and Measurement of Inflation," RBA Research Discussion Papers rdp9810, Reserve Bank of Australia.
    7. Claus, I., 1997. "A Measure of Underlying Inflation in the United States," Staff Working Papers 97-20, Bank of Canada.
    8. Hilde Christiane Bjørnland, 2001. "Identifying domestic and imported core inflation," Applied Economics, Taylor & Francis Journals, vol. 33(14), pages 1819-1831.
    9. Todd E. Clark, 2001. "Comparing measures of core inflation," Economic Review, Federal Reserve Bank of Kansas City, issue Q II, pages 5-31.
    Full references (including those not matched with items on IDEAS)

    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications

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