Core inflation

Since February 2000, the Federal Reserve Board’s semiannual monetary policy reports to Congress have described the Board’s outlook for inflation in terms of the PCE.

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Core inflation is a measure of inflation

Inflation

In economics, inflation is a rise in the general price level of goods and services in an economy over a period of time. The term "inflation" once referred to increases in the money supply ; however, economic debates about the relationship between money supply and price levels have led to its primary use today in describing price inflatio...
 which excludes certain items that face volatile price movements e.g. food products and energy.

The preferred measure by the Federal Reserve of core inflation in the United States

United States

The United States of America is a Federal government constitutional republic comprising U.S. state and a federal district. The country is situated mostly in central North America, where its Contiguous United States and Washington, D.C., the Capital districts and territories, lie between the Pacific Ocean and Atlantic Oceans, Borders of the U...
 is the core Personal consumption expenditures price index

Personal consumption expenditures price index

The PCE price index is a United States-wide indicator of the average increase in prices for all domestic personal consumption. It is indexed to a base of 100 in 1992....
. This is based on chained dollars.

Since February 2000, the Federal Reserve Board’s semiannual monetary policy reports to Congress have described the Board’s outlook for inflation in terms of the PCE. Prior to that, the inflation outlook was presented in terms of the CPI. In explaining its preference for the PCE, the Board stated:

The chain-type price index for PCE draws extensively on data from the consumer price index but, while not entirely free of measurement problems, has several advantages relative to the CPI. The PCE chain-type index is constructed from a formula that reflects the changing composition of spending and thereby avoids some of the upward bias associated with the fixed-weight nature of the CPI. In addition, the weights are based on a more comprehensive measure of expenditures. Finally, historical data used in the PCE price index can be revised to account for newly available information and for improvements in measurement techniques, including those that affect source data from the CPI; the result is a more consistent series over time.

—Monetary Policy Report to the Congress, Federal Reserve Board of Governors, Feb. 17, 2000

Previously the Federal Reserve had used the United States

United States

The United States of America is a Federal government constitutional republic comprising U.S. state and a federal district. The country is situated mostly in central North America, where its Contiguous United States and Washington, D.C., the Capital districts and territories, lie between the Pacific Ocean and Atlantic Oceans, Borders of the U...
 Consumer Price Index

Consumer price index

A consumer price index is a measure of the average price of consumer goods and services purchased by households. It is a price index determined by measuring the price of a standard group of goods meant to represent the typical market basket of a typical urban consumer....
 as its preferred measure of inflation. The CPI is still used for many purposes, for example, for indexing social security. The equivalent of the CPI is also commonly used by central banks of other countries when measuring inflation. The CPI is presented monthly in the US by the Bureau of Labor Statistics. This index tends to change more on a month to month basis than does "core inflation". This is because core inflation eliminates products that can have temporary price shocks (i.e. energy, food products). Core inflation is thus intended to be an indicator and predictor of underlying long-term inflation.

The concept of core inflation as aggregate price growth excluding food and energy was introduced in a 1975 paper by Robert J. Gordon

Robert J. Gordon

Robert James Gordon is an economics professor at Northwestern University. He also holds the title of "Stanley G. Harris, Professor in the social sciences"....
. This is the definition of "core inflation" most used for political purposes. Analysis by the Federal Reserve Bank of New York

Federal Reserve Bank of New York

The Federal Reserve Bank of New York is one of the 12 Federal Reserve Banks of the United States. It is located at 33 Liberty Street, New York City, New York State....
 indicates that this measure is no better than a moving average of the Consumer Price Index

Consumer price index

A consumer price index is a measure of the average price of consumer goods and services purchased by households. It is a price index determined by measuring the price of a standard group of goods meant to represent the typical market basket of a typical urban consumer....
 as a predictor of inflation.

There are also other types of measuring inflation rates. In the United States the Dallas Federal Reserve computes a trimmed mean PCE price index, which separates "noise" and "signal". This is trimmed at 19.4% at the lower tail end and 25.4% at the upper tail. The Cleveland Federal Reserve computes a Median CPI and a 16% trimmed mean CPI. Trimmed means that the highest rises and declines in prices are trimmed by a certain percentage, attributing to a more accurate measurement on core inflation. In relation to this, the Median CPI is usually higher than the trimmed figures for both PCE and CPI. There also is a median PCE, but is not widely used.

See also

• Headline inflation
  Headline inflation
  
  Headline inflation is a measure of the total inflation within an economy and is affected by areas of the market which may experience sudden inflationary spikes such as food or energy....
  

External links

• , Mark A.Wynne, Federal Reserve Bank of St. Louis Review, May/June 2008