The Evasive Predictive Ability of Core Inflation

30 Pages Posted: 9 Jan 2016

See all articles by Pablo M. Pincheira

Pablo M. Pincheira

Adolfo Ibanez University - School of Business

Jorge Selaive

University of Chile - Business School

Jose Nolazco

University of Chile - Department of Economics

Date Written: January 7, 2016

Abstract

We explore the ability of traditional core inflation – consumer prices excluding food and energy – to predict headline CPI annual inflation. We analyze a sample of OECD and non-OECD economies using monthly data from January 1994 to March 2015. Our results indicate that sizable predictability emerges for a small subset of countries. For the rest of our economies predictability is either subtle or undetectable. These results hold true even when implementing an out-of-sample test of Granger causality especially designed to compare forecasts from nested models. Our findings partially challenge the common wisdom about the ability of core inflation to forecast headline inflation, and suggest a careful weighting of the traditional exclusion of food and energy prices when assessing the size of the monetary stimulus.

Keywords: Inflation, Forecasting, Time Series, Monetary Policy, Core Inflation

JEL Classification: E31, E17, E37, E52, E58

Suggested Citation

Pincheira, Pablo M. and Selaive, Jorge and Nolazco, Jose, The Evasive Predictive Ability of Core Inflation (January 7, 2016). Available at SSRN: https://ssrn.com/abstract=2712490 or http://dx.doi.org/10.2139/ssrn.2712490

Pablo M. Pincheira (Contact Author)

Adolfo Ibanez University - School of Business ( email )

Diagonal Las Torres 2640
Peñalolén
Santiago
Chile

Jorge Selaive

University of Chile - Business School ( email )

Chile

Jose Nolazco

University of Chile - Department of Economics ( email )

Diagonal Paraguay 257
Torre 26, Of. 1801
Santiago
Chile

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