What is Core Inflation and Why Doesn’t It Include Food and Energy?

I frequently receive this question in one form or another: Why doesn’t the government consider food and energy, and just tracks core inflation?

The core inflation rate is frequently quoted in the popular press and this gives the general public the impression that the “government” doesn’t care about (or track) the rise in the prices of food and energy.

Actually this isn’t true.  The core inflation rate is simply a component of the overall inflation rate. It is used by economists because often seasonal factors will skew the inflation rate.

For instance a drought might cause fruit crops to fail, causing fruit prices to rise. But this rise actually has nothing to do with inflation (i.e. price inflation caused by an increase in the money supply). It is simply a result of the forces of nature.

Another example of forces of nature causing price increases is when a hurricane causes refineries or drilling rigs to shut down. This might cause a temporary decrease in oil supply and if supplies are tight it could result in a temporary increase in oil prices.

Economists want to eliminate this volatility from their calculations and so they use the “core” inflation rate to eliminate the two most volatile components from the calculation.

And so for some reason when “cub” reporters are assigned to report on inflation they choose the “core” since it sounds cool or something and people get the idea that the government has stopped tracking the entire range of goods and is only tracking the “core” inflation rate.

But I can assure you that the Bureau of Labor Statistics is still tracking about 10,000 different items every month and it publishes this information as the CPI-U or Consumer Price Index for all Urban consumers. This is used in calculating what is commonly called the “Inflation Rate“.

This is the number that pertains more to the average consumer because it more closely resembles what you might actually spend. As you might guess since it includes 10,000 different items, some of them are food and some are energy.  It also includes clothing, beverages, rent, recreation, medical care and even some strange things like bedroom furniture, college tuition, postage, telephone services, and computer software.

Obviously, you aren’t going to be buying bedroom furniture and computer software every month so your particular inflation rate will be somewhat different than the one calculated by the government but the numbers are weighted based upon how often the average consumer buys these items. So at least you can rest easy knowing that the two things that everyone needs (food and energy) has been included and is actually weighted much more heavily in the final calculation than bedroom furniture.

 

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