Measuring U.S. Core Inflation: The Stress Test of Covid-19

24 Pages Posted: 27 Dec 2021 Last revised: 25 Nov 2024

See all articles by Laurence Ball

Laurence Ball

Johns Hopkins University - Department of Economics; National Bureau of Economic Research (NBER); International Monetary Fund (IMF)

Daniel Leigh

International Monetary Fund (IMF); International Monetary Fund (IMF)

Prachi Mishra

International Monetary Fund (IMF) - Research Department

Antonio Spilimbergo

International Monetary Fund (IMF) - Research Department; Centre for Economic Policy Research (CEPR); University of Michigan at Ann Arbor - The William Davidson Institute

Date Written: December 2021

Abstract

Large price changes in industries affected by the COVID-19 pandemic have caused erratic fluctuations in the U.S. headline inflation rate. This paper compares alternative approaches to filtering out the transitory effects of these industry price changes and measuring the underlying or core level of inflation over 2020-2021. The Federal Reserve’s preferred measure of core, the inflation rate excluding food and energy prices, has performed poorly: over most of 2020-21, it is almost as volatile as headline inflation. Measures of core that exclude a fixed set of additional industries, such as the Atlanta Fed’s sticky-price inflation rate, have been less volatile, but the least volatile have been measures that filter out large price changes in any industry, such as the Cleveland Fed’s median inflation rate and the Dallas Fed’s trimmed mean inflation rate. These core measures have followed smooth paths, drifting down when the economy was weak in 2020 and then rising as the economy has rebounded.

Suggested Citation

Ball, Laurence M. and Leigh, Daniel and Leigh, Daniel and Mishra, Prachi and Spilimbergo, Antonio, Measuring U.S. Core Inflation: The Stress Test of Covid-19 (December 2021). NBER Working Paper No. w29609, Available at SSRN: https://ssrn.com/abstract=3994286

Laurence M. Ball (Contact Author)

Johns Hopkins University - Department of Economics ( email )

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Daniel Leigh

International Monetary Fund (IMF) ( email )

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International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
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Prachi Mishra

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States

Antonio Spilimbergo

International Monetary Fund (IMF) - Research Department ( email )

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United States
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Centre for Economic Policy Research (CEPR)

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