This was in connection with a discussion on the general increase in prices that was expected to happen in the United States: Even those who tend to agree with the concept of a rough balance between supply and demand (i.e. no inflationary or deflationary gap), point out that there is still a huge money supply— and that is the hard core of inflation…. In time, this concept began to be used increasingly often, especially when inflation began to rise at a rapid pace in the beginning of the 1970s (see Figure 1). 4 According to Gordon (1975a), the higher rate of inflation was due to a number of factors: That food prices had begun to increase faster as a result of supply factors in the United States and abroad, that the oil price had risen as a result of production restrictions introduced by the OPEC oil cartel, that the Nixon administration had introduced price and wage freezes and the devaluation of the dollar in 1971 and 1973. Now a need arose to distinguish temporary price increases from more lasting ones. 3 See, for instance, Rogers (1998) for a discussion of how central banks use the concept. The next reference in the same text search of Wynne is Sprinkler (1975). He writes: “Recent price increases of 10-12 percent annually were about double the hard-core inflation”. 4  3 [19]  Figure 1. CPI inflation in the USA Annual percentage change.
16 When inflation has a rising trend, the underlying inflation measure should increase at the same pace.17 On the other hand, the underlying measure should vary less than the target variable. The measure of underlying inflation should say something about the future actual inflation rate. The measure should be forward-looking, that is, say something about future inflation. If the underlying measure covaries with the trend in actual inflation, this should give some guidance regarding future developments. Let us imagine a situation where the underlying measure of inflation is higher than the actual rate of inflation. If it is a good measure of underlying inflation, it should then show the actual inflation rate rising somewhat further ahead. The measure of underlying inflation should covary with factors that are important to the development of the actual inflation rate. It is also desirable that the measure covaries with macroeconomic factors that are important to the development of actual inflation, such as the general demand situation in the economy. The better the measure succeeds in adjusting for white noise, the better it should covary with various explanatory factors. The measure of underlying inflation should be easy to understand. The underlying measure should be available soon after new data on actual inflation has been published. It should also be easy to understand how the indicators have been calculated. 16  The underlying measure should thus be persistent. 17 This type of trend is calculated in Clark (2001) with the aid of a centred moving average over 36 months.