Journal Article

A comparison of measures of core inflation


Abstract: The ability of central banks to differentiate between permanent and transitory price movements is critical for the conduct of monetary policy. The importance of gauging the persistence of price changes in a timely manner has led to the development of measures of underlying, or ?core,? inflation that are designed to remove transitory price changes from aggregate inflation data. Given the usefulness of this information to policymakers, there is a surprising lack of consensus on a preferred measure of U.S. core inflation. This article examines several proposed measures of core inflation?the popular ex food and energy series, an ex energy series, a weighted median series, and an exponentially smoothed series?to identify a ?best? measure. The authors evaluate the measures? performance according to criteria such as ease of design and accuracy in tracking trend inflation, as well as explanatory content for within-sample and out-of-sample movements in aggregate CPI and PCE inflation. The study reveals that the candidate series perform very differently across aggregate inflation measures, criteria, and sample periods. The authors therefore find no compelling evidence to focus on one particular measure of core inflation, including the series that excludes food and energy prices. They attribute their results to the design of the individual measures and the measures? inability to account for variability in the nature and sources of transitory price movements.

Keywords: Price indexes; Economic indicators; Inflation (Finance);

Access Documents

Authors

Bibliographic Information

Provider: Federal Reserve Bank of New York

Part of Series: Economic Policy Review

Volume: 13

Issue: Dec

Pages: 19-38