What Is Core Inflation?
What is core inflation? It is inflation with food and energy prices left out, because those two swing up and down more sharply and more often than other prices.
Petrol can jump on an oil headline and fall back a month later. That move says little about the wider economy. Core inflation filters it out, so the underlying trend is easier to see.
The core measures traders watch
- Core CPI: the Bureau of Labor Statistics publishes it as “all items less food and energy” (BLS CPI questions and answers). Its releases are on US Inflation Rate (CPI).
- Core PCE: the Bureau of Economic Analysis publishes the PCE price index excluding food and energy beside the headline (BEA). Its releases are on US PCE Price Index.
The next reports are on When is the next US CPI report? and When is the next PCE report?
Headline and core play different roles
Headline inflation is what households pay, food and energy included. In the US it is also the target itself: the Federal Reserve’s 2% goal is set on the headline PCE index.
The Fed explains that it seeks to stabilise overall prices, and that core measures can be useful in judging the trend (Federal Reserve FAQ). So headline is the goal, and core is the guide to where headline is heading.
When the two disagree
Take a US CPI report where headline inflation comes in below the forecast and core comes in above it.
- The soft headline says inflation is cooling.
- The firm core says the cooling came from cheaper petrol, while the underlying pressure rose.
If the market decides the Fed will look at core, it expects fewer rate cuts. The dollar can then rise on a report that looks soft at first glance.
Which one to read first
Do not average the two into one impression. Check which measure the central bank stresses in its own words, and let that one set your reading. When a bank has said it is watching core, a high headline driven by energy deserves much less weight. How a bank’s tone shifts the market’s reading is in What Is Hawkish and Dovish in Forex?