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How Well Does "Core" CPI Capture Permanent Price Changes?

Author

Listed:
  • Tara M. Sinclair

    () (Department of Economics/Institute for International Economic Policy, George Washington University)

  • Dennis W. Jensen

    () (Department of Economics, Texas A&M University)

  • Michael D. Bradley

    () (Department of Economics, George Washington University)

Abstract

We decompose core CPI and the food and energy CPI measures into permanent and transitory components using a correlated unobserved components model, to examine the behavior of core CPI when subject to shocks and to examine the claim that core CPI captures the persistent part of headline CPI. We find that the permanent component of core CPI is more volatile than core CPI, or that the permanent and transitory components are highly correlated. We find that the excluded food and energy components have important permanent components, and that core CPI has an important transitory component. We examine impulse response functions and find that headline CPI inflation responds more sharply to shocks than core CPI inflation, and after the first year the impact of shocks on headline inflation is less than the impact on core inflation.

Suggested Citation

  • Tara M. Sinclair & Dennis W. Jensen & Michael D. Bradley, 2009. "How Well Does "Core" CPI Capture Permanent Price Changes?," Working Papers 2009-13, The George Washington University, Institute for International Economic Policy.
  • Handle: RePEc:gwi:wpaper:2009-13
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    File URL: http://www.gwu.edu/~iiep/assets/docs/papers/Sinclair_IIEPWP2009-13.pdf
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    References listed on IDEAS

    as
    1. Mark A. Wynne, 2008. "Core inflation: a review of some conceptual issues," Review, Federal Reserve Bank of St. Louis, issue May, pages 205-228.
    2. Bodenstein, Martin & Erceg, Christopher J. & Guerrieri, Luca, 2008. "Optimal monetary policy with distinct core and headline inflation rates," Journal of Monetary Economics, Elsevier, vol. 55(Supplemen), pages 18-33, October.
    3. Andrew Bauer & Nicholas Haltom & William B. Peterman, 2004. "Decomposing inflation," Economic Review, Federal Reserve Bank of Atlanta, issue Q 1, pages 39-51.
    4. 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.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    unobserved components; CPI; price indices; inflation; core;

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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