Loading the player...

What is 'Headline Inflation'

Headline inflation is the raw inflation figure as reported through the Consumer Price Index (CPI) that is released monthly by the Bureau of Labor Statistics. The CPI calculates the cost to purchase a fixed basket of goods, as a way of determining how much inflation is occurring in the broad economy. The CPI uses a base year and indexes the current year's prices according to the base year's values.

BREAKING DOWN 'Headline Inflation'

As it includes all aspects within an economy that experience inflation, headline inflation is not adjusted to remove highly volatile figures, including those that can shift regardless of economic conditions. Often, headline inflation is closely related to shifts in the cost of living, which provides useful information to consumers within the marketplace.

The headline figure is not adjusted for seasonality or for the often-volatile elements of food and energy prices, which are removed in the core CPI. Headline inflation is usually quoted on an annualized basis, meaning that a monthly headline figure of 4% inflation equates to a monthly rate that, if repeated for 12 months, would create 4% inflation for the year. Comparisons of headline inflation are typically made on a year-over-year basis, also known as "top-line inflation."

Negatives of Rising Inflation

Inflation is a threat to long-term investors because it erodes the value of future dollars, can stifle economic growth, and can cause a rise in prevailing interest rates. While headline inflation tends to get the most attention in the media, core inflation is often considered the more valuable metric to follow. Both headline and core results are followed closely by investors, and are also used by economists and central banking figures to set economic growth forecasts and monetary policy.

Core Inflation

Core inflation removes the CPI components that can exhibit large amounts of volatility from month to month, which can cause unwanted distortion to the headline figure. The most commonly removed factors are those relating to the cost of food and energy. Food prices can be affected by factors outside of those attributed to the economy, such as environmental shifts that cause issues in the growth of crops. Energy costs, such as oil production, can be affected by forces outside of traditional supply and demand, such as political dissent.

From 1957 until 2016, the average core inflation rate in the United States was listed as 3.70%. The all-time high was 13.60%, which occurred in June of 1980. The lowest rate was recorded in May of 1957 with an inflation rate of 0%. As of 2016, the Federal Reserve’s goal rate for core inflation was 2%.

RELATED TERMS
  1. Inflation Trade

    An inflation trade is an investing scheme or trading method that ...
  2. Core Inflation

    A measure of inflation that excludes certain items that face ...
  3. Price Inflation

    Price inflation is the increase in a collection of goods and ...
  4. Inflation

    The rate at which the general level of prices for goods and services ...
  5. Inflation Swap

    A derivative used to transfer inflation risk from one party to ...
  6. Insurance Inflation Protection

    Insurance inflation protection is designed to allow policyholders ...
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. Insights

    Understanding Core Inflation

    Core inflation is a measure of inflation that excludes certain items that have volatile price movements.
  3. Investing

    What Causes Inflation in the United States

    Inflation is the main catalyst behind U.S monetary policy. But what causes this phenomenon of sustained rising prices? Read on to find out.
  4. Insights

    Inflation And Economic Recovery

    Inflation impacts the costs of every facet of the economy. Discover how it can help or hinder the economic recovery.
  5. Financial Advisor

    Why Inflation Feels Higher Than the Fed's Target Rate

    Follow the monthly readings on core PCE inflation in the Personal Income and Outlays reports to understand the Federal Reserve's inflation assessments.
  6. 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.
  7. Retirement

    Inflation and Financial Planning: A Primer

    Inflation can erode wealth over time and must be considered carefully in a financial plan.
  8. Insights

    How Inflation Affects Your Net Worth

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

    Retirement Planning: Why Real Rates of Return Matter Most

    Here's how to plot your real rate of return, understand your "personal inflation rate" and safeguard your retirement funds against inflation.
RELATED FAQS
  1. What is inflation and how should it affect my investing?

    Inflation, an economic concept, is an economy-wide sustained trend of increasing prices from one year to the next. The rate ... Read Answer >>
  2. What is the difference between the cost of living and the cost of inflation?

    Increases in the general price level is called inflation, whereas cost of living is an estimate of the cost of an average ... 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. 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 >>
  5. What's the lowest year-over-year inflation rate in the history of the U.S.?

    Learn about years with the lowest year-over-inflation in U.S. history. Read about how inflation is calculated using the consumer ... Read Answer >>
  6. When is the best time to buy a fixed income security?

    Determine the optimal time to buy fixed income securities; the key is inflation and interest rates falling, which makes the ... Read Answer >>
Hot Definitions
  1. Debt/Equity Ratio

    The D/E ratio indicates how much debt a company is using to finance its assets relative to the value of shareholders’ equity.
  2. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange.
  3. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
  4. Return On Equity - ROE

    The amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability ...
  5. Bond

    A bond is a fixed income investment in which an investor loans money to an entity (corporate or governmental) that borrows ...
  6. Whole Life Insurance Policy

    A life insurance contract with level premiums that has both an insurance and an investment component. The insurance component ...
Trading Center