Saturday, May 24, 2008

I THOUGHT THIS WAS OBVIOUS

I had been intuitively troubled by the use of "core inflation" as a measure of inflation because it ignores energy and food inflation. Now, via Barry Ritholtz at The Big Picture, I learn that the Philadelphia Fed has some empirical reasons to support my intuition:
The research team essentially found that Core Inflation is an erroneous way to measure ongoing price increases. Both of the main rationales offered for policymakers€™ for their focus on core measures of inflation do not survive close scrutiny, argues a group of researchers.

Their main findings were that:

-Other components of Inflation are more Volatile than Food & Energy;
-Core Inflation is less Valuable as Inflation Forecastor;
-Combining CPI and PCE inflation measures can lead to more accurate forecasts


NOTE for those like me who didn't know this acronym: PCE == Personal Consumption Expenditure

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