The Evasive Predictive Ability of Core Inflation
30 Pages Posted: 9 Jan 2016
Date Written: January 7, 2016
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
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