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Working Paper
An Alternative Measure of Core Inflation: The Trimmed Persistence PCE Price Index
I introduce the "trimmed persistence PCE," a new measure of core inflation in which component prices are weighted according to the time-varying persistence of their price changes. The components of trimmed persistence personal consumption expenditures (PCE) display less tendency to mechanically pass-through the level of the prior period's inflation to the current period; thus, the impact of the current stance of monetary policy and real economic factors are more likely to be visible in recent trimmed persistence inflation compared to headline inflation. Trimmed persistence inflation performs ...
Discussion Paper
Inflation Persistence—An Update with December Data
This post presents an updated estimate of inflation persistence, following the release of personal consumption expenditure (PCE) price data for December 2022. The estimates are obtained by the Multivariate Core Trend (MCT), a model we introduced on Liberty Street Economics last year and covered most recently in a January post. The MCT is a dynamic factor model estimated on monthly data for the seventeen major sectors of the PCE price index. It decomposes each sector’s inflation as the sum of a common trend, a sector-specific trend, a common transitory shock, and a sector-specific transitory ...
Working Paper
Is It Time to Reassess the Focal Role of Core PCE Inflation?
In this paper, I review the history of “core” PCE inflation and its rationale: remove volatile items with transitory shocks to better highlight the trend in inflation. Structural changes in the inflation process imply that, on a “reducing volatility” basis, the list of items excluded from the “core” inflation basket (aside from gasoline) is far from optimal. This is true whether one assesses volatility on the basis of a weighted component monthly, or an index monthly, or a 12-month index, or a 5-year index. In addition, I demonstrate other deficiencies of exclusion indexes. ...
Working Paper
The role of commodity prices in forecasting U.S. core inflation
This note documents a curious finding about the substantial forecast ability of a simple aggregator of three commodity futures prices for U.S. core inflation. The proposed aggregator reduces the out-of-sample root mean squared error for 12-month-ahead inflation forecasts of the benchmark AR(1) model by 28 percent (20 percent) for the PCE (CPI) measure of core inflation. To avoid obfuscation of the sources of forecast ability, the model is intentionally kept simple, although extensions for improving and increasing the robustness of the forecast procedure are also discussed.
Working Paper
A Broader Perspective on the Inflationary Effects of Energy Price Shocks
Consumers purchase energy in many forms. Sometimes energy goods are consumed directly, for instance, in the form of gasoline used to operate a vehicle, electricity to light a home or natural gas to heat a home. At other times, the cost of energy is embodied in the prices of goods and services that consumers buy, say when purchasing an airline ticket or when buying online garden furniture made from plastic to be delivered by mail. Previous research has focused on quantifying the pass-through of the price of crude oil or the price of motor gasoline to U.S. inflation. Neither approach accounts ...
Journal Article
The New York Fed Staff Underlying Inflation Gauge (UIG)
A measure of underlying inflation that uses all relevant information, is available in real time, and forecasts inflation better than traditional underlying inflation measures?such as core inflation measures?would greatly benefit monetary policymakers, market participants, and the public. This article presents the New York Fed Staff Underlying Inflation Gauge (UIG) for the consumer price index and the personal consumption expenditures deflator. Using a dynamic factor model approach, the UIG is derived from a broad data set that extends beyond price series to include a wide range of nominal, ...
Using Core Inflation to Predict Headline Inflation
An analysis of CPI data suggests that a measure of inflation excluding food and energy and a measure excluding only energy are useful predictors of overall inflation 12 months in the future.
Journal Article
Will a Cooler Labor Market Slow Supercore Inflation?
Inflation has declined substantially since its peak in June 2022. This largely reflects lower energy prices and more moderate price increases for core goods, as global supply chain constraints have eased and consumers have resumed more normal spending patterns, shifting back from goods toward services. In contrast, inflation for core services continues to rise, in part due to lingering pandemic-related increases in shelter prices that are still affecting official inflation statistics (Lansing, Oliveira, and Shapiro 2022). However, because new rents are rising more slowly, policymakers expect ...
Report
CONDI: a cost-of-nominal-distortions index
We construct a price index with weights for the prices of different PCE (personal consumption expenditures) goods chosen to minimize the welfare costs of nominal distortions. In this cost-of-nominal-distortions index (CONDI), the weights are computed in a multi-sector New Keynesian model with time-dependent price setting. The model is calibrated using U.S. data on the dispersion of price stickiness and labor shares across sectors. We find that the CONDI weights depend mostly on price stickiness and are less affected by the dispersion in labor shares. Moreover, CONDI stabilization closely ...
Core Inflation Revisited: Forecast Accuracy across Horizons
How far out can you forecast inflation? This analysis examines the accuracy of core inflation in predicting headline inflation for periods ranging from three to 24 months in the future.