#08-22
Core Measures of Inflation as Predictors of Total Inflation
Theodore M. Crone, N. Neil K. Khettry, Loretta J. Mester and Jason A. Novak, May 2008
Abstract: Two rationales offered for policymakers’ focus on core measures of inflation as a guide to underlying inflation are that core inflation omits food and energy prices, which are thought to be more volatile than other components, and that core inflation is thought to be a better predictor of total inflation over time horizons of import to policymakers. Our investigation finds little support for either rationale. We find that food and energy prices are not the most volatile components of inflation and that depending on which inflation measure is used, core inflation is not necessarily the best predictor of total inflation. However, we do find that combining CPI and PCE inflation measures can lead to statistically significant more accurate forecasts of each inflation measure, suggesting that each measure includes independent information that can be exploited to yield better forecasts.
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