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Excluding items from personal consumption expenditures inflation

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  • Jim Dolmas

Abstract

Core inflation measures constructed by excluding particularly volatile items from the price index have a long history. The most common such measures are indexes excluding the prices of food and energy items. This paper attempts to shed some statistical light on the impact of excluding certain items from the personal consumption expenditures (PCE) price index. In particular, I am interested in the trade-off between reducing shortrun volatility (relative to the volatility of the headline index) and possibly distorting the measurement of inflation over longer horizons. Some of the questions this paper addresses are: Which items have the highest time series volatility? Among the items with high volatility, are there meaningful patterns in the distribution of volatility across high and low frequencies? Which items, by their exclusion, have the largest impact on longer-horizon measures of inflation? And which, by their exclusion, contribute the most to reducing high-frequency volatility in measured inflation? Excluding items that answer the last question yields a PCE index which compares favorably to PCE ex food and energy along several dimensions, while excluding only half as many items by expenditure weight.

Suggested Citation

  • Jim Dolmas, 2009. "Excluding items from personal consumption expenditures inflation," Staff Papers, Federal Reserve Bank of Dallas, issue Jun.
    • Handle: RePEc:fip:feddst:y:2009:i:jun:n:7
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    References listed on IDEAS

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    4. Robert W. Rich & Charles Steindel, 2007. "A comparison of measures of core inflation," Economic Policy Review, Federal Reserve Bank of New York, vol. 13(Dec), pages 19-38.
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    6. Mick Silver, 2007. "Core Inflation: Measurement and Statistical Issues in Choosing Among Alternative Measures," IMF Staff Papers, Palgrave Macmillan, vol. 54(1), pages 163-190, May.
    7. Jim Dolmas, 2005. "Trimmed mean PCE inflation," Working Papers 0506, Federal Reserve Bank of Dallas.
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    Cited by:

    1. Alan K. Detmeister, 2012. "What should core inflation exclude?," Finance and Economics Discussion Series 2012-43, Board of Governors of the Federal Reserve System (U.S.).

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