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Is it Time to Reassess the Focal Role of Core PCE Inflation in Assessing the Trend in PCE Inflation?

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  • Randal Verbrugge

    (Federal Reserve Bank of Cleveland)

Abstract

“Core” PCE inflation—that is, inflation in PCE-ex-food-and-energy—is widely used as an estimate of trend inflation. But it is long overdue for replacement. The original rationale of core inflation was to remove volatile items with transitory shocks. But aside from gasoline, the list of excluded items is far from optimal. Core inflation also suffers from other severe deficiencies, common to all exclusion indexes. Excluded items often have persistent trends; thus excluding them imparts a significant time-varying bias. Items that are not excluded can experience high volatility, and will cause exclusion indexes to depart notably from trend inflation—as core PCE has done at crucial moments. Two other prominent trend inflation measures, trimmed mean PCE inflation and median PCE inflation, gracefully address these issues (though neither is perfect). A wide variety of evidence comparing these three trend measures is provided. The findings indicate that, for a variety of considerations that are relevant for both trend inflation estimation and for monetary policy deliberations and communication, either trimmed mean PCE inflation or medianPCE inflation are superior measures.

Suggested Citation

  • Randal Verbrugge, 2022. "Is it Time to Reassess the Focal Role of Core PCE Inflation in Assessing the Trend in PCE Inflation?," Revista Economía, Fondo Editorial - Pontificia Universidad Católica del Perú, vol. 45(89), pages 73-101.
  • Handle: RePEc:pcp:pucrev:y:2022:i:89:p:73-101
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    File URL: https://revistas.pucp.edu.pe/index.php/economia/article/view/25649/24152
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    Cited by:

    1. Randal Verbrugge & Saeed Zaman, 2024. "Post‐COVID inflation dynamics: Higher for longer," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 43(4), pages 871-893, July.
    2. Verbrugge, Randal & Zaman, Saeed, 2024. "Improving inflation forecasts using robust measures," International Journal of Forecasting, Elsevier, vol. 40(2), pages 735-745.

    More about this item

    Keywords

    Trend inflation; Core inflation; Monetary policy communication;
    All these keywords.

    JEL classification:

    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications

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