Authors: Robert Rich and Charles Steindel

• An essential component of the monetary policymaking process is the ability of central banks to differentiate between permanent and transitory price movements.
  
  
• The importance of gauging the persistence of price changes in a timely manner has led to the development of measures of underlying, or “core,” inflation that are designed to remove transitory price changes from aggregate inflation data. By filtering out these transitory changes, policymakers gain a better sense of the trend in inflation.
  
  
• Given the importance of this information, there is a surprising lack of consensus on a preferred measure of U.S. core inflation.
  
  
• Rich and Steindel examine several proposed measures of core inflation in order to identify a “best” measure:
  
  
• the popular ex food and energy series,
  
  
• an ex energy series,
  
  
• a weighted median series, and
  
  
• an exponentially smoothed series.
  
  
• The authors find that no measure of core inflation consistently dominates the others.
  
  
• Their study evaluates the performance of the core inflation measures based on several criteria:
  
  
  
• Transparency of design: the ability to explain the corresponding measures of core inflation in a relatively straightforward, reproducible fashion.
  
  
• Similarity of means: the ability to match the mean of the goal inflation series over a long period of time.
  
  
• Accuracy in tracking trend inflation: the ability to follow closely the underlying trend in the goal inflation series.
  
  
• Explanatory content for within-sample and out-of-sample movements in aggregate CPI and PCE inflation.
  
  
• Rich and Steindel show that the candidate series perform differently across various sample periods, forecast horizons, and aggregate inflation measures.
  
  

• They conclude that there is too much variability in the nature and sources of transitory price movements to be captured effectively through the design of any individual measure, including the standard series that excludes food and energy prices.

Robert Rich is a research officer and Charles Steindel a senior vice president at the Federal Reserve Bank of New York.

The views expressed in this summary are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System.