Measuring Inflation at the Core

Economic Forecasts

Measuring Inflation at the Core

Why some measures of price changes ignore food and fuel.

When the U.S. Bureau of Labor Statistics produces the consumer price index, Uncle Sam's official inflation gauge, it measures overall price changes for a basket of goods and services. The monthly stat is often referred to as "headline" inflation. The headlines lately are pretty shocking to anyone who buys groceries or gas: Food and energy prices are soaring. Food prices could rise 4% this year, and oil prices are likely to keep climbing.

So why would some economists -- including those at the Federal Reserve -- zero in on "core" inflation, an alternative CPI calculation that excludes all or most food and energy prices? Food and energy prices are volatile, more subject to extreme, short-term swings than other things we buy. Core inflation, the argument goes, provides a more accurate, long-term picture of price movement.

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But the dramatic rise of food and fuel costs can make core-inflation figures seem wildly off base. Policymakers have long debated whether more weight should be given to commodities. Now, the rise of emerging economies strengthens the case for paying more attention to food and energy prices, says Ken Mayland, president of ClearView Economics. Events such as uprisings in the Middle East will still create short-term volatility. But as developing nations, such as Brazil, China and India, grow and their citizens can afford a higher quality of life, households consume more meat, grain and oil, increasing demand. That's creating an upward trend in food and energy prices that didn't exist in past decades, says Mayland -- a trend that's likely to persist in coming years, and one that may soon command everyone's full attention.