The Recent Performance of the Traditional Measure of Core Inflation in G7 Countries

This paper undertakes an empirical investigation concerning the performance of the traditional measure of core inflation in recent years. It considers the group of G7 countries and explores both the high-frequency and the low-frequency relations between overall inflation and core inflation. It shows that the traditional core measure, obtained by subtracting from the overall index those components which exhibit high volatility and which are responsible for the short-run variability of inflation, is a reliable indicator of trend inflation for a group of countries including the US, Canada and Japan. Innovation accounting shows that for the three countries the transitory shock, i.e., the total inflation shock, has limited persistence and hence there is a relatively quick convergence of overall inflation to its trend component.