Finance and Economics Discussion Series (FEDS)
June 2012
What Should Core Inflation Exclude?
Abstract:
Consumer price inflation excluding food and energy often performs worse than other measures of underlying inflation in out-of-sample tests of predicting future inflation or tracking an ex-post measure of underlying trend inflation. Nonetheless, inflation excluding food and energy remains popular for its simplicity and transparency. Would excluding different items improve performance while maintaining the simplicity and transparency? Unfortunately, probably not. Averaging across a series of tests suggests that knowing what items to exclude before seeing the data is problematic and excluding food and energy is not a bad ex-ante guess. However, ex-post it is not difficult to construct an index which performs considerably better than excluding food and energy.
Full paper (Screen Reader Version)Keywords: Inflation, price level, core inflation
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