The Usefulness of Core PCE Inflation Measures

45 Pages Posted: 10 Jan 2012

See all articles by Alan K. Detmeister

Alan K. Detmeister

Board of Governors of the Federal Reserve System

Date Written: December 1, 2011

Abstract

This paper examines a number of alternative PCE price inflation measures including overall PCE inflation, PCE inflation excluding food and energy, trimmed mean PCE inflation, component-smoothed inflation, variance-weighted inflation, inflation with weights based on disaggregated regressions, and survey measures of inflation expectations. When averaging across a handful of specifications based on the primary uses of a core inflation measure three conclusions arise: 1. Inflation rates for nearly all the measures best track ex-post trend inflation or predict future overall inflation when they are averaged over a considerable number of months. Overall PCE price inflation should be averaged over 18 months or longer. A shorter averaging period is appropriate for core measures, often on the order of 12 months. 2. Even after appropriately averaging each index, core inflation indexes generally perform better than overall inflation. 3. Exclusion indexes, such as PCE excluding food and energy, perform slightly worse than many other possible core inflation measures; trimmed mean PCE, or a variance-weighted index, may be better choice for a summary inflation measure.

Keywords: Inflation, core prices

JEL Classification: E31, E37

Suggested Citation

Detmeister, Alan K., The Usefulness of Core PCE Inflation Measures (December 1, 2011). FEDS Working Paper No. 2011-56, Available at SSRN: https://ssrn.com/abstract=1982524 or http://dx.doi.org/10.2139/ssrn.1982524

Alan K. Detmeister (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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