A Comparison of Measures of Core Inflation

20 Pages Posted: 16 Dec 2007

See all articles by Robert W. Rich

Robert W. Rich

Federal Reserve Bank of Cleveland

Charles Steindel

Federal Reserve Bank of New York

Date Written: December 2007

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: retail banking, bank branches, banking

JEL Classification: C53, E31, E52

Suggested Citation

Rich, Robert W. and Steindel, Charles, A Comparison of Measures of Core Inflation (December 2007). Economic Policy Review, Vol. 13, No. 3, December 2007, Available at SSRN: https://ssrn.com/abstract=1072923 or http://dx.doi.org/10.2139/ssrn.1072923

Robert W. Rich (Contact Author)

Federal Reserve Bank of Cleveland ( email )

East 6th & Superior
Cleveland, OH 44101-1387
United States
216 579-2928 (Phone)

Charles Steindel

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States