Core Measures of Inflation as Predictors of Total Inflation

Abstract

Policymakers tend to focus on core inflation measures because they are thought to be better predictors of total inflation over time horizons of import to policymakers.We find little support for this assumption.While some measures of core inflation are less volatile than total inflation, core inflation is not necessarily the best predictor of total inflation.The relative forecasting performance of models using core inflation and those using only total inflation depends on the inflation measure and time horizon of the forecast.Unlike previous studies, we provide a measure of the statistical significance of the difference in forecast errors.

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