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PCE inflation and core inflation

  • Julie K. Smith

This paper investigates the forecasting accuracy of the trimmed mean inflation rate of the Personal Consumption Expenditure (PCE) deflator. Earlier works have examined the forecasting ability of limited-influence estimators (trimmed means and the weighted median) of the Consumer Price Index but none have compared the weighted median and trimmed mean of the PCE. Also addressed is the systematic bias that appears due to the differences in the means of inflation measures over the sample. This paper supports earlier results that limited-influence estimators provide better forecasts of future inflation than does the popular measure of core inflation, PCE inflation minus food and energy; therefore, these limited-influence estimators are core inflation.

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File URL: http://www.dallasfed.org/assets/documents/research/papers/2012/wp1203.pdf
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Paper provided by Federal Reserve Bank of Dallas in its series Working Papers with number 1203.

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Date of creation: 2012
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Handle: RePEc:fip:feddwp:1203
Contact details of provider: Web page: http://www.dallasfed.org/
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  1. Smith, Julie K, 2004. "Weighted Median Inflation: Is This Core Inflation?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(2), pages 253-63, April.
  2. Freeman, Donald G., 1998. "Do core inflation measures help forecast inflation?," Economics Letters, Elsevier, vol. 58(2), pages 143-147, February.
  3. Harvey, David & Leybourne, Stephen & Newbold, Paul, 1997. "Testing the equality of prediction mean squared errors," International Journal of Forecasting, Elsevier, vol. 13(2), pages 281-291, June.
  4. Jim Dolmas, 2005. "Trimmed mean PCE inflation," Working Papers 0506, Federal Reserve Bank of Dallas.
  5. Robert Rich & Charles Steindel, 2005. "A review of core inflation and an evaluation of its measures," Staff Reports 236, Federal Reserve Bank of New York.
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