A Volatility and Persistence-Based Core Inflation

Intuitively core inflation is understood as a measure of inflation where noisy price movements areavoided. This is typically achieved by either excluding or downplaying the importance of the mostvolatile items. However, some of those items show high persistence, and one certainly does notwant to disregard persistent price changes. The non-equivalence between volatility and (the lackof) persistence implies that when one excludes volatile items relevant information is likely to bediscarded. Therefore, we propose a new type of core inflation measure, one that takessimultaneously into account both volatility and persistence. The evidence shows that suchmeasures far outperform those based on either volatility or persistence. The latter have beenadvocated in the literature in recent years.