Headline vs Core Inflation : A Wavelet Investigation

Using US and EU data, the present paper investigates if the core inflation, the measure of price growth obtained excluding the more volatile items such as energy and food prices, is a good approxi- mation of the headline inflation that considers the entire bundle. Starting from mid-90s, our answer is negative. From a monetary policy perspective, this raises the issue if controlling the core inflation is still useful to anchor the medium-run inflation expectations. Using the wavelet methodology, our analysis suggests that starting from the mid-90s core inflation is weakly correlated with headline inflation. The inclusion of energy items into the core can help to anchor the medium-term inflation expectations