Headline CPI Research Articles

Connectionist-based rules describing the pass-through of individual goods prices into trend inflation in the United States

This paper examines the inflation “pass-through” problem in American monetary policy, defined as the relationship between changes in the growth rates of individual goods and the subsequent economy-wide rate of growth of consumer prices. Initial relationships are established with Granger causality tests robust to structural breaks. A feedforward artificial neural network (ANN) is used to approximate the functional relationship between selected component subindexes and the headline CPI. Moving beyond the ANN “black box”, we illustrate how decision rules can be extracted from the network.

Conocophillips’ Share Price Model Revisited

Three years ago we found a statistically reliable link between ConocoPhillips’ (NYSE: COP) stock price and the difference between the core and headline CPI in the United States. In this article, the original relationship is revisited with new data available since 2009. The agreement between the observed monthly closing price (adjusted for dividends and splits) and that predicted from the CPI difference is confirmed. The original quantitative link is validated. In order to improve the accuracy of the COP price prediction a series of advanced models is developed. The original set of two major CPIs is extended by smaller components of the headline CPIs (e.g. the CPIs of motor fuel and housing energy) and several PPIs (e.g. the PPIs of crude oil and coal) which may be inherently related to ConocoPhillips and other energy companies. These advanced models have demonstrated much lower modeling errors with better statistical properties. The earlier reported quasi-linear trend in the CPI difference is also revisited. This trend allows for an accurate prediction of the COP prices at a five to ten year horizon.

Connectionist-Based Rules Describing the Pass-Through of Individual Goods Prices into Trend Inflation in the United States

This paper examines the inflation pass-through problem in American monetary policy, defined as the relationship between changes in the growth rates of individual goods and the subsequent economy-wide rate of growth of consumer prices. Granger causality tests robust to structural breaks are used to establish initial relationships. Then, feedforward artificial neural network (ANN) is used to approximate the functional relationship between selected component subindexes and the headline CPI. Moving beyond the ANN black box, we illustrate how decision rules can be extracted from the network. Our custom decompositional extraction algorithm generates rules in human-readable and machine-executable form (Matlab code). Our procedure provides an additional route, beyond direct Bayesian estimation, for empirical econometric relationships to be embedded in DSGE models. A topic for further research is embedding decision rules within such models.

Should Food Be Excluded from Core CPI?

The greater a component’s SNR, the more useful the component should be in forecasting headline CPI.

CPI Inflation: Running on Motor Fuel

Fluctuations in the price of motor fuel (mainly gasoline) have caused most of the monthly noise and year-over-year fluctuations of headline CPI inflation over the past four years.

Survey Measures of Expected Inflation and the Inflation Process

This paper uses data from surveys of expected inflation to learn how the expectations formation processes of households and professionals have changed following a change in the inflation process in the early part of this decade. Households do not appear to have recognized the change in the process, and are placing substantially more weight than appears warranted on recent inflation data when forming expectations about inflation over the next year. Professional forecasters do appear to have changed how they predict inflation in recent years, in a way that appears consistent, at first, with the finding that the ‘core’ inflation process has not changed as much as the ‘headline’ inflation process has. But the professionals appear to be placing too much weight on lagged core inflation data, and over recent sample periods professional forecasts of headline CPI inflation are noticeably worse than the alternatives. Some other evidence is consistent with the hypothesis that they are now focusing on the core CPI.

Optimal Price Indices for Targeting Inflation Under Incomplete Markets

In models with complete markets, targeting core inflation enables monetary policy to maximize welfare by replicating the flexible price equilibrium. We develop a two-sector two-good new-Keynesian model to study the optimal choice of price index in markets with financial frictions. We find that, in the presence of financial frictions, a welfare-maximizing central bank should adopt flexible headline inflation targeting a target for headline CPI inflation with some weight on the output gap. These results are particularly relevant for emerging markets, where the share of food expenditures in total consumption expenditures is high and a large proportion of consumers are credit constrained.

ConocoPhillips and Exxon Mobil Stock Price

Exxon Mobil and ConocoPhillips stock price has been predicted using the difference between core and headline CPI in the United States. Linear trends in the CPI difference allow accurate prediction of the prices at a five to ten-year horizon.

Sustainable Trends in Producer Price Indices

Previously, linear trends were revealed in the differences between the headline CPI and the price indices for various subcategories of the CPI in the United States. These trends can be continuous, as observed with the price index for medical care, or piecewise with turning points between trends with opposite signs. Similar features are found for the PPI and its components. The presence of sustainable trends in the differences allows prediction of prices for various commodities at time horizons of several years. In addition, it is possible to time the start of transition to the next trend. Accordingly, the trends reduce the uncertainty in forecasting prices for major commodities and also for their small components. The usage of trends in the PPI could bring substantial benefits to producers (planning) and stock market participants (timely investment).

A Fair Price for Motor Fuel in the United States

In the United States, there exist robust linear trends in the differences between headline (or core) CPI and price indices for individual subcategories of goods and services such as energy, food, housing, etc. Chiefly these differences can be represented by a piece-wise straight line. The periods of the transition from one trend to another are characterized by an elevated volatility. The difference between the core CPI and the price index for motor fuel can be also accurately approximated by several straight lines. In 2008, the negative trend was replaced with a positive one, and thus, a very high volatility in motor fuel price was observed, with an extension into 2009. The change in the trend was accompanied by an “overshoot” in the price for motor oil, which dropped much lower than that expected from the new trend. Therefore, the difference has to return to the new positive trend in 2009. During the recovery period, the index for motor fuel will grow by 90 units or 50%. The price for motor fuel in the US will also grow by 50% by the end of 2009. Oil price is expected to rise by ~50% as well, from its current value of ~$50 per barrel. Therefore, the fair price is not a fixed value but a linear function of time.

Apples and Oranges: Relative Growth Rate of Consumer Price Indices

Headline CPI, core CPI, and indices for various small expenditure categories were analyzed. Sustainable long-term linear trends have been found in the difference between the headline CPI and these indices. Overall, the results completely support our previous findings for such principal categories as energy, food, housing, etc. One should return to relative price of apples and oranges in order to explain these linear trends in terms of the mainstream economics.

How Well Does 'Core' CPI Capture Permanent Price Changes?

We decompose core CPI and the food and energy CPI measures into permanent and transitory components using a correlated unobserved components model, to examine the behavior of core CPI when subject to shocks and to examine the claim that core CPI captures the persistent part of headline CPI. We find that the permanent component of core CPI is more volatile than core CPI, or that the permanent and transitory components are highly correlated. We find that the excluded food and energy components have important permanent components, and that core CPI has an important transitory component. We examine impulse response functions and find that headline CPI inflation responds more sharply to shocks than core CPI inflation, and after the first year the impact of shocks on headline inflation is less than the impact on core inflation.

Long-Term Linear Trends in Consumer Price Indices

Headline CPI, core CPI and indices for various expenditure categories were analyzed. Long-term linear trends have been found in the difference between the core CPI and the headline CPI in the USA. Duration of these periods is different for positive (18 years) and negative (8 years) trends, and the trends change to opposite during some shorter time intervals of 2 to 4 years. The difference between the core CPI and the index for energy is similar to that between the core CPI and headline CPI. The index for energy will reach the core CPI in 2008, however. Then, one should not expect further increase in energy price beyond that dictated by the CPI. It is likely that oil price will be falling in absolute terms. The difference between the core CPI and the index for food also has two linear branches after 1980, but the slope of the current trend is weak and the difference will intercept zero line only in 2014. The difference between the core CPI and the housing index is characterized by an almost constant duration of negative and positive branches - approximately 11 years. The current period of negative slope in the difference will approach its turning point in 2008 or 2009 and is characterized by very high volatility. The next trend has to be positive, i.e. the housing index will be growing at a lower rate than the headlining CPI. The difference for the transportation index had a longer period of positive slope - between 1980 and 2004. During this period the difference reached the level of 30 units of index. Currently, a turning period is observed and a negative slope is developing. The difference related to price indices allows to accurately predicting the evolution of relevant stock market indices.

Input–Output Based Measures of Underlying Domestic Inflation: Empirical Evidence from Denmark 1903–2002

The paper presents input–output based time-series data for the underlying domestic inflation in Denmark 1903–2002 and analyses the inflationary development during the last century. More conceptual issues in relation to the interpretation and use of input–output based domestic inflation measures are also discussed. The purpose of such inflation measures is to track the development in the domestic market-determined inflation, which is closely related to the price of gross value added in the domestic market-based private business sector. A price index for value added often displays a different short-term development than the headline CPI. Such differences can be useful in an assessment of the current inflationary environment and in relation to an interpretation of the historical inflation development.

The Performance of Trimmed Mean Measures of Underlying Inflation

This paper uses data for Australia, the United States, Japan and the euro area to examine the relative performance of the headline CPI, exclusion-based ‘cores’, and trimmed means as measures of underlying inflation. We find that trimmed means tend to outperform headline and exclusion measures on a range of different criteria, indicating that they can be thought of as having better signal-to-noise ratios. We also find that there is a wide range of trims that perform well. One innovation for the United States is to break up the large implicit rent component in the US CPI into four regional components, which improves the performance of trimmed means, especially large trims such as the weighted median.

Core Inflation and Monetary Policy

What are the implications of targeting different measures of inflation? We extend a basic theoretical framework of optimal monetary policy under inflation targeting (Svensson 1997) to include several components of CPI inflation, and analyse the implications of using different measures of inflation as the target variable – headline CPI inflation, core inflation, and CPI excluding interest rates. Our main results are the following. First, barring the interest rate component, temporary shocks to inflation do not affect optimal monetary policy under any regime. Second, indirect (second‐round) effects of disturbances on target variables need to be accounted for properly. Simply excluding seemingly temporary disturbances from the reaction function risks leading to inappropriate policy responses. Third, it may be optimal to respond to changes in one measure of inflation even if the target is defined in terms of another. Fourth, the presence of the direct interest rate component in the CPI tends to push optimal monetary policy in an expansionary direction. The net effect, considering also the traditional channel, however, depends on the nature of the initial disturbance.

Inflation targets and the yield curve: New Zealand and Australia versus the US

This study considers whether the slope of the yield curve for New Zealand contains useful economic information. In order to provide some perspective, the present study also contrasts the New Zealand experience with evidence based on US and Australian data. The principal findings of this study are as follows: (1) At short horizons, typically 2 years or less, the term structure for New Zealand behaves as in the expectations hypothesis of the term structure. (2) Nevertheless, there are departures from the expectations hypothesis, especially in the period when inflation objectives in New Zealand were on a declining path. Moreover, the policies of the US had a critically important impact around 1993–1994. (3) Some evidence was found of an effect from the spread to future inflation but only when the headline CPI is used to measure inflation; the links disappear entirely once CPI ex-credit costs are employed. The study argues that such results are consistent with a credible inflation targeting regime, so that the term structure serves possibly to signal changes in real interest rates rather than inflation in New Zealand. (4) There is good evidence that the spread helps predict future output in New Zealand, although the effect seems to dissipate after 1 year. Once we distinguish between periods of positive versus negative growth rates in real gross domestic product (GDP), the spread influences output up to 2 years into the future. Also, when output growth is measured asymmetrically, rising inflation expectations depress output growth. Copyright © 2000 John Wiley & Sons, Ltd.