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How Well Does "Core" CPI Capture Permanent Price Changes?

Author

Listed:
  • Tara Sinclair

    (Institute for International Economic Policy, George Washington University)

  • Dennis W. Jansen

    (Department of Economics, Texans A&M University)

  • Michael D. Bradley

    (Economics Department, George Washington University)

Abstract

We decompose core CPI and the food and energy CPI measures into permanent and transitory components using a correlated unobserved components model, to examine the behavior of core CPI when subject to shocks and to examine the claim that core CPI captures the persistent part of headline CPI. We find that the permanent component of core CPI is more volatile than core CPI, or that the permanent and transitory components are highly correlated. We find that the excluded food and energy components have important permanent components, and that core CPI has an important transitory component. We examine impulse response functions and find that headline CPI inflation responds more sharply to shocks than core CPI inflation, and after the first year the impact of shocks on headline inflation is less than the impact on core inflation.

Suggested Citation

  • Tara Sinclair & Dennis W. Jansen & Michael D. Bradley, 2009. "How Well Does "Core" CPI Capture Permanent Price Changes?," Working Papers 2010-09, The George Washington University, Institute for International Economic Policy.
    • Handle: RePEc:gwi:wpaper:2010-09
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    File URL: http://www.gwu.edu/~iiep/assets/docs/papers/Sinclair_IIEPWP2010-9.pdf
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    References listed on IDEAS

    as
    1. Bodenstein, Martin & Erceg, Christopher J. & Guerrieri, Luca, 2008. "Optimal monetary policy with distinct core and headline inflation rates," Journal of Monetary Economics, Elsevier, vol. 55(Supplemen), pages 18-33, October.
    2. Mark A. Wynne, 2008. "Core inflation: a review of some conceptual issues," Review, Federal Reserve Bank of St. Louis, vol. 90(May), pages 205-228.
    3. Andrew Bauer & Nicholas Haltom & William B. Peterman, 2004. "Decomposing inflation," Economic Review, Federal Reserve Bank of Atlanta, vol. 89(Q 1), pages 39-51.
    4. Julie Smith, 2005. "Inflation targeting and core inflation," Canadian Journal of Economics, Canadian Economics Association, vol. 38(3), pages 1018-1036, August.
    5. James H. Stock & Mark W. Watson, 2007. "Why Has U.S. Inflation Become Harder to Forecast?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(s1), pages 3-33, February.
    6. Robert W. Rich & Charles Steindel, 2005. "A review of core inflation and an evaluation of its measures," Staff Reports 236, Federal Reserve Bank of New York.
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    1. repec:dgr:rugsom:12009-eef is not listed on IDEAS
    2. Dungey, Mardi & Jacobs, Jan & Tian, Jing & Norden, Simon van, 2012. "On trend-cycle decomposition and data revision," Research Report 12009-EEF, University of Groningen, Research Institute SOM (Systems, Organisations and Management).

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    More about this item

    Keywords

    unobserved components; core CPI; food CPI; energy CPI; inflation;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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