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Working Paper

Efficient Inflation Estimation

This paper investigates the use of trimmed means as high-frequency estimators of inflation. The known characteristics of price change distributions, specifically the observation that they generally exhibit high levels of kurtosis, imply that simple averages of price data are unlikely to produce efficient estimates of inflation. Trimmed means produce superior estimates of 'core inflation,' which we define as a long-run centered moving average of CPI and PPI inflation. We find that trimming 9% from each tail of the CPI price-change distribution, or 45% from the tails of the PPI price-change distribution, yields an efficient estimator of core inflation for these two series, although lesser trims also produce substantial efficiency gains. Historically, the optimal trimmed estimators are found to be nearly 23% more efficient (in terms of root-mean-square error) than the standard mean CPI, and 45% more efficient than the mean PPI. Moreover, the efficient estimators are robust to sample period and to the definition of the presumed underlying long-run trend in inflation.

Working Papers of the Federal Reserve Bank of Cleveland are preliminary materials circulated to stimulate discussion and critical comment on research in progress. They may not have been subject to the formal editorial review accorded official Federal Reserve Bank of Cleveland publications. The views expressed in this paper are those of the authors and do not represent the views of the Federal Reserve Bank of Cleveland or the Federal Reserve System.

Suggested Citation

Bryan, Michael F., Stephen Cecchetti, and Rodney Wiggins II. 1997. “Efficient Inflation Estimation.” Federal Reserve Bank of Cleveland, Working Paper No. 97-07.