Loading the player...

What is 'Core Inflation'

Core inflation is the change in prices of goods and services, but does not include those from the food and energy sectors. This measure of inflation excludes these items because their prices are much more volatile. It is most often calculated using the consumer price index (CPI).

BREAKING DOWN 'Core Inflation'

Core inflation is measured by both the the CPI and the core personal consumption expenditures index (PCE). Other methods of calculating core inflation include the outliers method, which removes the products that have had the largest price changes. Core inflation is thought to be an indicator of underlying long-term inflation.

Why Food and Energy Aren't Included in Core Inflation

Food and energy prices are exempt from this calculation because their prices are too volatile. Because food and energy are necessary staples, demand doesn't change much even though prices may rise. Even though gas prices may rise with the price of oil, you will still need to fill up the tank in order to drive your car. Similarly, you won't be pushing off buying your groceries just because prices are rising at the store. It's for this reason that the prices for these goods are not included in the calculation of core inflation. 

A New Measure for Core Inflation

In January 2012, the Federal Reserve declared it would rather use the PCE index than CPI since PCE provided inflation trends that are less affected by short-term price changes. To get underlying trends that are not affected by short-term price movements caused by traders and speculators, the Bureau of Economic Administration (BEA) calculates the change of prices by using existing gross domestic product (GDP) data. It also adds in the monthly Retail Survey data and compares them with the consumer prices provided by the CPI. These additions remove data irregularities, providing detailed long-term trends.

The Importance of Core Inflation

It is important to measure core inflation because it reflects the relationship between the price of goods and services and the price of consumers' general income. If goods and services increase over time but the income of consumers do not, consumers will have weaker buying power since the value of their money decreases in comparison to the value of basic goods and services. However, if inflation happens to consumers' income and nothing changes with the prices of goods and services, consumers will have better buying power and can afford more of the same goods and services. When consumers' stock portfolio or home prices increase, asset inflation occurs, which provides more money for the consumer as well.

  1. Inflation Targeting

    Inflation targeting is a central banking policy that revolves ...
  2. Basket Of Goods

    A basket of goods is a fixed set of consumer products and services ...
  3. Nominal GDP

    A gross domestic product (GDP) figure that has not been adjusted ...
  4. Inflation-Adjusted Return

    A measure of return that accounts for the return period's inflation ...
  5. Core Earnings

    Core earnings are derived from a company's main or principal ...
  6. Consumer Price Index - CPI

    A measure that examines the weighted average of prices of a basket ...
Related Articles
  1. Insights

    A Primer On Inflation

    Inflation has a negative connotation, but is it all bad or does it offer some tangible benefits?
  2. Investing

    How Inflation Affects Your Cash Savings

    Prices tend to rise over time and this inflation can cut into the value of your savings. Here are some ways you can manage the situation.
  3. Trading

    How CPI Affects the Dollar Against Other Currencies

    The Consumer Price Index is a broad measure of inflation, and inflation can have a dramatic impact on a currency's value against rival currencies.
  4. Insights

    How Inflation Affects Your Net Worth

    When calculating your net worth, don't forget to take inflation into account.
  5. Insights

    Inflation Data and the Fed: What to Expect

    Deutsche Bank does not expect the rise in inflation to persist for long, due to disappointing GDP growth.
  6. Personal Finance

    Fight Back Against Inflation

    Inflation is often a consequence of economic recovery. Here's how you can protect your financial portfolio.
  7. Insights

    The Consumer Price Index: A Friend To Investors

    As a measure of inflation, this index can help you make key financial decisions.
  8. Retirement

    How Inflation Eats Away at Your Retirement

    When calculating how much money you need to comfortably retire, it's important to factor in how much inflation can chip away at your savings.
  1. How does inflation affect fixed-income investments?

    Learn about the ways inflation can harm fixed-income investments. Find out how to monitor the impact of inflation using common ... Read Answer >>
  2. What's the highest year-over-year inflation rate in the history of the U.S.?

    Learn about periods with the highest inflation in U.S. history and the mandated role of the U.S. Federal Reserve in controlling ... Read Answer >>
  3. Why Are P/E Ratios Higher When Inflation Is Low?

    P/E ratios are generally higher during times of low inflation, but why is this the case? Read Answer >>
  4. Will the consumer price index (CPI) be updated or revised in the future?

    Learn about the consumer price index (CPI) and understand how its purpose and calculation make it necessary to continually ... Read Answer >>
Hot Definitions
  1. Standard Deviation

    A measure of the dispersion of a set of data from its mean, calculated as the square root of the variance. The more spread ...
  2. Entrepreneur

    An entrepreneur is an individual who founds and runs a small business and assumes all the risk and reward of the venture.
  3. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  4. Perfect Competition

    Pure or perfect competition is a theoretical market structure in which a number of criteria such as perfect information and ...
  5. Compound Interest

    Compound Interest is interest calculated on the initial principal and also on the accumulated interest of previous periods ...
  6. Income Statement

    A financial statement that measures a company's financial performance over a specific accounting period. Financial performance ...
Trading Center