U.S. Core Inflation: A Wavelet Analysis

TL;DR

This paper introduces wavelet methods for estimating U.S. core inflation, demonstrating they outperform traditional CPI and regression-based measures in tracking trend inflation and predicting future inflation.

Contribution

It is the first to apply wavelet analysis to core inflation estimation, showing improved performance over traditional methods.

Findings

Wavelet-based measures outperform traditional CPI-based measures.

Wavelet methods better follow trend inflation.

Wavelet approaches show promise for future inflation research.

Abstract

This paper proposes the use of wavelet methods to estimate U.S. core inflation. It explains wavelet methods and suggests they are ideally suited to this task. Comparisons are made with traditional CPI-based and regression-based measures for their performance in following trend inflation and predicting future inflation. Results suggest that wavelet-based measures perform better, and sometimes much better, than the traditional approaches. These results suggest that wavelet methods are a promising avenue for future research on core inflation.