Inflation: Core vs. Headline

Inflation measures the rate of change in all prices.Maintaining low and stable inflation is one of the primary goals of macroeconomic policy.But how should inflation be measured?Policymakers, particularly at the Federal Reserve, often refer to core inflation in their policy decisions.Core inflation is commonly defined as a measure of inflation that omits changes in food and energy prices.Some policymakers prefer to use core inflation to predict future overall inflation because food and energy price volatility makes it difficult to discern trends from the overall inflation rate.A drawback of an over-reliance on core inflation, however, is that an extended period of rapidly rising energy prices could cause all other prices to accelerate.A focus on core may cause policymakers to fail to react to such a rise in inflation until it is too late.This scenario may have occurred recently.Furthermore, several studies have failed to find core inflation to be a good forecaster of future inflation, casting doubt on the very rationale for relying on it.This report will not be updated.