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PCE inflation and core inflation

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  • Smith, Julie K.

Abstract

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.

Suggested Citation

  • Smith, Julie K., 2012. "PCE inflation and core inflation," Working Papers 1203, Federal Reserve Bank of Dallas.
    • Handle: RePEc:fip:feddwp:1203
    DOI: 10.24149/wp1203
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    File URL: http://www.dallasfed.org/assets/documents/research/papers/2012/wp1203.pdf
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    References listed on IDEAS

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    1. Laurence Ball & N. Gregory Mankiw, 1995. "Relative-Price Changes as Aggregate Supply Shocks," The Quarterly Journal of Economics, Oxford University Press, vol. 110(1), pages 161-193.
    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. James Dolmas, 2005. "Trimmed mean PCE inflation," Working Papers 0506, Federal Reserve Bank of Dallas.
    5. Robert W. Rich & Charles Steindel, 2005. "A review of core inflation and an evaluation of its measures," Staff Reports 236, Federal Reserve Bank of New York.
    6. Smith, Julie K, 2004. "Weighted Median Inflation: Is This Core Inflation?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(2), pages 253-263, April.
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    Cited by:

    1. Dowd, Kevin & Cotter, John & Loh, Lixia, 2011. "U.S. Core Inflation: A Wavelet Analysis," Macroeconomic Dynamics, Cambridge University Press, vol. 15(04), pages 513-536, September.
    2. Jose Luis Nolazco & Pablo Pincheira & Jorge Selaive, 2016. "The evasive predictive ability of core inflation," Working Papers 15/34, BBVA Bank, Economic Research Department.
    3. Stefano Siviero & Giovanni Veronese, 2011. "A policy-sensible benchmark core inflation measure," Oxford Economic Papers, Oxford University Press, vol. 63(4), pages 648-672, December.
    4. James B. Bullard, 2011. "Measuring inflation: the core is rotten," Review, Federal Reserve Bank of St. Louis, issue July, pages 223-234.
    5. Pincheira, Pablo & Selaive, Jorge & Nolazco, Jose Luis, 2017. "Forecasting Inflation in Latin America with Core Measures," MPRA Paper 80496, University Library of Munich, Germany.

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    Keywords

    Price levels; Forecasting;

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