Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
957908 | Journal of Economics and Business | 2015 | 16 Pages |
•The dynamic relationship between core and headline inflation varies over time.•Generally shocks to headline have larger effects on core with accommodative policy.•The trimmed mean does not respond to headline shocks.•This difference likely arises from the trimming of the trimmed mean.
This paper investigates the dynamic relationship between headline and core inflation across monetary policy regimes for both the Consumer Price Index and Personal Consumption Expenditure deflator. Our work differs from previous work in that we consider a broader set of core inflation measures. Core inflation measures considered include the respective less food and energy inflation rates and the respective weighted median or trimmed mean inflation rates. Our bivariate vector autoregressions reveal that shocks to headline inflation account for a larger fraction of the forecast error variance of most core measures in the pre-1980 samples. This result is broadly consistent with the findings of previous studies that shocks to headline inflation feed back into core inflation during periods when monetary policy is more accommodative. But our examination of this broader set of core measures also reveals important differences across those measures. In particular, shocks to headline inflation have no impact on the trimmed mean CPI inflation rate in both the pre-1980 and post-1984 samples.