DEFINITION of Hodrick-Prescott (HP) Filter
The Hodrick-Prescott (HP) Filter is a data-smoothing technique. The Hodrick-Prescott Filter is commonly applied during analysis to remove short-term fluctuations that are associated with the business cycle. Removal of these short-term fluctuations reveals long-term trends. This can help with economic or other forecasting associated with the business cycle.
BREAKING DOWN Hodrick-Prescott (HP) Filter
The Hodrick-Prescott (HP) filter is used to determine the long term trend of a time series by discounting the importance of short term price fluctuations. In practice it is used to smooth and detrend the Conference Board's Help Wanted Index (HWI) so that it can be benchmarked against the Bureau of Labor Statistic's JOLTS, an economic data series that may more accurately measure job vacancies in the U.S.