Working Paper: CEPR ID: DP17002
Authors: Laurence M. Ball; Daniel Leigh; Prachi Mishra; Antonio Spilimbergo
Abstract: Large price changes in industries affected by the COVID-19 pandemic have caused erratic fluctuations in theU.S. headline inflation rate. This paper compares alternative approaches to filtering out the transitory effects ofthese industry price changes and measuring the underlying or core level of inflation over 2020-2021. The FederalReserve’s preferred measure of core, the inflation rate excluding food and energy prices (XFE), has performedpoorly: over most of 2020-21, it is almost as volatile as headline inflation. Measures of core that exclude a fixedset of additional industries, such as the Atlanta Fed’s sticky-price inflation rate, have been less volatile, but theleast volatile have been measures that filter out large price changes in any industry, such as the Cleveland Fed’smedian inflation rate and the Dallas Fed’s trimmed mean inflation rate. These core measures have followedsmooth paths, drifting down when the economy was weak in 2020 and then rising as the economy hasrebounded.
Keywords: measures of core inflation
JEL Codes: E31; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| core inflation measures (E31) | economic conditions (E66) |
| core inflation measures (E31) | economic slack (E24) |
| unemployment deviations from natural rates (J64) | core inflation measures (E31) |
| XFE inflation (E31) | volatility (E32) |
| outlier-exclusion measures (C20) | volatility (E32) |
| economic conditions (E66) | outlier-exclusion measures (C20) |
| outlier-exclusion measures (C20) | economic slack (E24) |
| fixed-exclusion measures (C52) | economic conditions (E66) |