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The dynamic relationship between core and headline inflation

Author

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  • Gamber, Edward N.
  • Smith, Julie K.
  • Eftimoiu, Raluca

Abstract

This paper investigates the dynamic relationship between headline and core inflation across monetary policy regimes for both the Consumer Price Index and Personal Consumption Expenditure deflator. Our work differs from previous work in that we consider a broader set of core inflation measures. Core inflation measures considered include the respective less food and energy inflation rates and the respective weighted median or trimmed mean inflation rates. Our bivariate vector autoregressions reveal that shocks to headline inflation account for a larger fraction of the forecast error variance of most core measures in the pre-1980 samples. This result is broadly consistent with the findings of previous studies that shocks to headline inflation feed back into core inflation during periods when monetary policy is more accommodative. But our examination of this broader set of core measures also reveals important differences across those measures. In particular, shocks to headline inflation have no impact on the trimmed mean CPI inflation rate in both the pre-1980 and post-1984 samples.

Suggested Citation

  • Gamber, Edward N. & Smith, Julie K. & Eftimoiu, Raluca, 2015. "The dynamic relationship between core and headline inflation," Journal of Economics and Business, Elsevier, vol. 81(C), pages 38-53.
    • Handle: RePEc:eee:jebusi:v:81:y:2015:i:c:p:38-53
    DOI: 10.1016/j.jeconbus.2015.05.002
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