What Is Core Inflation?

Core inflation tracks how prices are rising across the economy, leaving out food and energy, since the prices of those items tend to swing unpredictably. It is commonly calculated using the 澳洲幸运5官方开奖结果体彩网:consumer price index (CPI) and the core personal consumption expe🍸nditures (PCE) index.

Excluding Food and Energy

Food and energy prices are exempt when calculating core inflation because of their price volatility. Food and energy are consumer staples, meaning demand for them doesn't change as prices rise. For example, gas prices may rise with the price of oil, but consumers will still need to fill up their tanks to drive their cars.

Oil and gas are 澳洲幸运5官方开奖结果体彩网:commodities and traded on exchanges. Food is also traded, including wheat, corn, and pork. The speculation of energy and food commodities leads to volatility in their prices, causing wild swings in the inflation figures. For example, a drought can cause dramatic effects on the prices of crops.

CPI vs. PCE

The Federal Reserve prefers to use the PCE index rather than CPI since PCE tends to provide inflation trends that are less affected by short-term price changes. Also, the 澳洲幸运5官方开奖结果体彩网:Bureau of Economic Analysis (BEA), a division of the Department of Commerce, calculates the change in prices by using existing 澳洲幸运5官方开奖结果体彩网:gross domestic product (GDP) data, which helps to dete💃rmine an overall trend in prices.

The GDP figure is a measure of the production of all goods and services in the U.S. The BEA also adds in the monthly retail survey data and compares it with the consumer prices provided by the CPI. These additions remove data irregularities and provide detailed long-term trends.

Core Inflation and Consumer Spending

It is crucial to measure core inflation because it reflects the relationship between the price of goods and services and the level of consumer income. If prices for goods and services increase over time but consumer income doesn't change, consumers will have less 澳洲幸运5官方开奖结果体彩网:purchasing power. Inflation causes the value🀅 of money or income to decrease in comparison to the prices of basic goods and services.

However, if consumer income or wage growth rises, while the prices of goods and services remain unchanged, consumers ꦏwill have more purchasing poꦿwer. Also, as investment portfolios and home prices rise, asset inflation occurs, which can provide additional money for consumers to spend.

The Bottom Line

Inflation is one of the key measures of economic health, indicating how quickly prices are rising and how quickly money is losing its value. However, the prices of fooꦿd and fuel tend to fluctuate more than other commodities, making it difficult to show price trends. By🅘 omitting these volatile categories, core inflation is considered a more reliable measure of price growth over the long term.