Is Inflation Excluding Food and Energy the Best Measure of Underlying Inflation?
The most popular core inflation measures used and published in the United States are quite straightforward: They simply exclude changes in food and energy prices. However, such simple “exclusion” measures can likely be improved upon. For example, many of the food categories excluded in the standard measure of core inflation, such as food away from home (restaurants), are not highly volatile and so likely should remain in an optimal core inflation measure. On the other hand, some items that are not excluded from the U.S. core measures, such as airline fares, tobacco, and apparel, are extremely volatile and thus are unlikely to be included in an optimal core inflation measure. The Bank of Canada, for example, uses a more targeted approach to its core inflation indicator, the CPIX. Of fifty-four consumer product categories, it excludes eight, which account for about 16 percent of the consumption basket (Macklem, 2001). Most of the eight items are also excluded from the standard core measu
