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The Evasive Predictive Ability of Core Inflation

Pablo Pincheira (), Jorge Selaive () and Jose Nolazco ()

MPRA Paper from University Library of Munich, Germany

Abstract: We explore the ability of traditional core inflation –consumer prices excluding food and energy– to predict headline CPI annual inflation. We analyze a sample of OECD and non-OECD economies using monthly data from January 1994 to March 2015. Our results indicate that sizable predictability emerges for a small subset of countries. For the rest of our economies predictability is either subtle or undetectable. These results hold true even when implementing an out-of-sample test of Granger causality especially designed to compare forecasts from nested models. Our findings partially challenge the common wisdom about the ability of core inflation to forecast headline inflation, and suggest a careful weighting of the traditional exclusion of food and energy prices when assessing the size of the monetary stimulus.

Keywords: Inflation; Forecasting; Time Series; Monetary Policy; Core Inflation (search for similar items in EconPapers)
JEL-codes: E3 E31 E37 E4 E43 E44 E5 E52 (search for similar items in EconPapers)
Date: 2016-01-06
New Economics Papers: this item is included in nep-cba, nep-for, nep-mac and nep-mon
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