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Core measures of inflation as predictors of total inflation

  • Theodor M. Crone
  • N. Neil K. Khettry
  • Loretta J. Mester
  • Jason A. Novak

Policymakers tend to focus on core inflation measures because they are thought to be better predictors of total inflation over time horizons of import to policymakers. The authors find little support for this assumption. While some measures of core inflation are less volatile than total inflation, core inflation is not necessarily the best predictor of total inflation. The relative forecasting performance of models using core inflation and those using only total inflation depends on the inflation measure and time horizon of the forecast. Unlike previous studies, the authors provide a measure of the statistical significance of the difference in forecast errors. ; Supersedes Working Paper 08-9.

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Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 11-24.

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Date of creation: 2011
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Handle: RePEc:fip:fedpwp:11-24
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  1. Cristadoro, Riccardo & Forni, Mario & Reichlin, Lucrezia & Veronese, Giovanni, 2001. "A Core Inflation Index for the Euro Area," CEPR Discussion Papers 3097, C.E.P.R. Discussion Papers.
  2. Michael F. Bryan & Stephen G. Cecchetti, 1993. "Measuring Core Inflation," NBER Working Papers 4303, National Bureau of Economic Research, Inc.
  3. James H. Stock & Mark W. Watson, 1989. "New Indexes of Coincident and Leading Economic Indicators," NBER Chapters, in: NBER Macroeconomics Annual 1989, Volume 4, pages 351-409 National Bureau of Economic Research, Inc.
  4. Mark A. Wynne, 1999. "Core inflation: a review of some conceptual issues," Working Papers 9903, Federal Reserve Bank of Dallas.
  5. Raffaella Giacomini & Halbert White, 2003. "Tests of conditional predictive ability," Boston College Working Papers in Economics 572, Boston College Department of Economics.
  6. Andrew Ang & Geert Bekaert & Min Wei, 2005. "Do Macro Variables, Asset Markets or Surveys Forecast Inflation Better?," NBER Working Papers 11538, National Bureau of Economic Research, Inc.
  7. Cogley, Timothy, 2002. "A Simple Adaptive Measure of Core Inflation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(1), pages 94-113, February.
  8. James H. Stock & Mark W. Watson, 2006. "Why Has U.S. Inflation Become Harder to Forecast?," NBER Working Papers 12324, National Bureau of Economic Research, Inc.
  9. Brent Meyer & Mehmet Pasaogullari, 2010. "Simple ways to forecast inflation: what works best?," Economic Commentary, Federal Reserve Bank of Cleveland, issue Dec.
  10. 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.
  11. James H. Stock & Mark W. Watson, 2007. "Erratum to "Why Has U.S. Inflation Become Harder to Forecast?"," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(7), pages 1849-1849, October.
  12. 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.
  13. Michael T. Kiley, 2008. "Estimating the common trend rate of inflation for consumer prices and consumer prices excluding food and energy prices," Finance and Economics Discussion Series 2008-38, Board of Governors of the Federal Reserve System (U.S.).
  14. Marlene Amstad & Simon Potter, 2009. "Real time underlying inflation gauges for monetary policymakers," Staff Reports 420, Federal Reserve Bank of New York.
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