Measuring U.S. Core Inflation: The Stress Test of COVID-19

Abstract

Large price changes in industries affected by the COVID-19 crisis caused erratic fluctuations in the U.S. headline inflation rate. This paper compares alternative approaches to filtering out the transitory effects of these industry price changes and measuring the underlying or core level of inflation over 2020–2021, the height of the pandemic. The Federal Reserve's preferred measure of core, the inflation rate excluding food and energy prices, performed poorly over that period: it was almost as volatile as headline inflation. Measures of core that exclude a fixed set of additional industries, such as the Atlanta Fed's sticky-price inflation rate, were less volatile, but the least volatile were measures that filter out large price changes in any industry, such as the Cleveland Fed's median inflation rate and the Dallas Fed's trimmed mean inflation rate. These core measures followed smooth paths, drifting down when the economy was weak in 2020 and then rising as the economy rebounded.