Core Inflation
Quick Definition
A measure of inflation that excludes volatile food and energy prices to reveal underlying, persistent price trends in the economy.
Key Takeaways
- Excludes volatile food and energy prices from inflation measurement
- The Federal Reserve prefers core PCE as its primary inflation gauge
- The Fed targets a 2% annual core inflation rate
- More useful than headline inflation for identifying persistent price trends
- Shelter and services costs are major components of core inflation
What Is Core Inflation?
Core inflation measures the rate of price increases in the economy after removing the volatile food and energy components from the Consumer Price Index (CPI) or Personal Consumption Expenditures (PCE) index. Food and energy prices fluctuate significantly due to weather, geopolitical events, and supply disruptions, which can obscure the underlying inflation trend. By stripping out these volatile components, core inflation provides a clearer picture of persistent price pressures and is better suited for monetary policy decisions. The Federal Reserve prefers core PCE as its primary inflation gauge, targeting a 2% annual rate. Core CPI is also widely followed. When core inflation persistently exceeds the Fed's target, it typically signals the need for tighter monetary policy, even if headline inflation appears moderate.
Core Inflation Example
- 1Despite headline CPI falling to 3%, core inflation remained sticky at 4.5%, keeping the Fed on a hawkish path with continued rate hikes.
- 2The Fed targets core PCE inflation of 2% because it strips out volatile food and energy prices that can distort the inflation picture.
- 3Shelter costs, which make up about 36% of core CPI, remained elevated and kept core inflation above target through 2023.
Related Terms
CPI (Consumer Price Index)
A measure of the average change in prices paid by urban consumers for a basket of goods and services, used as the primary gauge of inflation.
Inflation
The rate at which the general level of prices for goods and services rises over time, reducing the purchasing power of money.
Federal Reserve (The Fed)
The central banking system of the United States, responsible for monetary policy, bank regulation, and financial stability.
Monetary Policy
Actions by a central bank to manage the money supply and interest rates to achieve macroeconomic objectives like stable prices and full employment.
GDP (Gross Domestic Product)
The total monetary value of all finished goods and services produced within a country's borders in a specific time period.
Recession
A significant, widespread, and prolonged decline in economic activity, commonly defined as two consecutive quarters of negative GDP growth.
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