Examining the ability of core inflation to capture the overall trend of total inflation

This article examines whether core inflation is able to predict the overall trend of total inflation using real-time data in a parametric and nonparametric framework. Specifically, two sample periods and five in-sample forecast horizons in two measures of inflation, which are the Personal Consumption Expenditure (PCE) and the Consumer Price Index (CPI), are used in the exclusions-from-core inflation persistence model. This article finds that core inflation is only able to capture the overall trend of total inflation for the 12-quarter in-sample forecast horizon using the CPI in both the parametric and nonparametric models in the longer sample period. The nonparametric model outperforms the parametric model for both data samples and for all five in-sample forecast horizons.