How Well Does "Core" CPI Capture Permanent Price Changes?
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.
|Date of creation:||Oct 2009|
|Date of revision:|
|Contact details of provider:|| Web page: http://www.gwu.edu/~iiep/|
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- 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.
- Mark A. Wynne, 2008.
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Federal Reserve Bank of St. Louis, issue May, pages 205-228.
- Mark A. Wynne, 1999. "Core inflation: a review of some conceptual issues," Working Papers 9903, Federal Reserve Bank of Dallas.
- Wynne, Mark A., 1999. "Core inflation: a review of some conceptual issues," Working Paper Series 0005, European Central Bank.
- Martin Bodenstein & Christopher J. Erceg & Luca Guerrieri, 2008.
"Optimal monetary policy with distinct core and headline inflation rates,"
International Finance Discussion Papers
941, Board of Governors of the Federal Reserve System (U.S.).
- 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 S18-S33, October.
- Andrew Bauer & Nicholas Haltom & Wiliam Peterman, 2004. "Decomposing inflation," Economic Review, Federal Reserve Bank of Atlanta, issue Q 1, pages 39 - 51.
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