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Why Do We Use Core Inflation?

Posted on August 28, 2008

There is a lot of confusion over the Fed's use of core inflation as part of its policy making process. One reason for confusion is that we using a single measure to summarize three different definitions of the term core inflation based upon how it is used. First, core inflation is used to forecast future inflation. For example,this recent paper uses a bivariate integrated moving average ... model ... that fits the data on inflation very well, and finds that the long-run trend rate of inflation is best gauged by focusing solely on prices excluding food and energy prices. That is, this pap...

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economy , energy costs , energy prices , policy