Short-Term Headline-Core Inflation Dynamics

FRB Richmond Economic Quarterly, Vol. 95, No. 3, Summer 2009, pp. 289-313

25 Pages Posted: 13 Dec 2012

See all articles by Yash P. Mehra

Yash P. Mehra

Federal Reserve Banks - Federal Reserve Bank of Richmond

Devin Reilly

University of Pennsylvania - Department of Economics

Date Written: 2009

Abstract

This article investigates empirically short-term dynamics between headline and core measures of consumer price index and personal consumption expenditure inflation over three sample periods: 1959:1–1979:1, 1979:2–2001:2, and 1985:1–2007:2. Headline and core inflation measures are co-integrated, suggesting long-run co-movement. However, the ways these two variables adjust to each other in the short run and generate co-movement have changed across these sample periods. In the pre-1979 sample period, when a positive gap opens up with headline inflation rising above core inflation, the gap is eliminated mainly as a result of headline inflation not reverting and core inflation moving toward headline inflation. These dynamics suggest headline inflation would be better than core inflation in assessing the permanent component of inflation. In post-1979 sample periods, however, the positive gap is eliminated as a result of headline inflation reverting more strongly toward core inflation than core inflation moving toward headline inflation, suggesting core inflation would be better than headline inflation in assessing the permanent component of inflation. This change in headline-core inflation dynamics may be due to the Federal Reserve having convinced the public it would no longer accommodate shocks to food and energy prices.

Suggested Citation

Mehra, Yash P. and Reilly, Devin, Short-Term Headline-Core Inflation Dynamics (2009). FRB Richmond Economic Quarterly, Vol. 95, No. 3, Summer 2009, pp. 289-313. Available at SSRN: https://ssrn.com/abstract=2188497

Yash P. Mehra (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States
804-697-8247 (Phone)
804-697-8255 (Fax)

Devin Reilly

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
36
Abstract Views
306
PlumX Metrics