US Core Inflation is a measure of inflation that excludes volatile items like energy and food. It’s also known as the Fed’s preferred inflation gauge and is used to determine whether or not the US economy is overheating. The Federal Reserve sets an annual target for US Core Inflation at 1-3%.
US Core Inflation, defined
Core inflation, by contrast, is a more accurate measure of inflation than regular inflation.
Core inflation is calculated by removing volatile items from the CPI and is not affected by the price of oil or gas. That makes it a better measure of how prices change in goods and services that aren’t subject to seasonal fluctuations.
For example, if you want to buy a car that costs $20,000 one month but $21,000 the following month, core inflation will show you that your cost rose by 2% per year. It yields a nice estimate of what’s going on with your purchasing power over time!
How Core Inflation Differs from Regular Inflation
Core inflation is the rate of inflation that excludes volatile food and energy prices. Since those products tend to be more affected by the whims of nature and international trade, core inflation provides a more accurate picture of overall price increases.
Core inflation is also a better indicator of economic health than regular, or headline, inflation because it’s less subject to short-term fluctuations in prices.
For example, when oil prices are high and rising fast—as they were from 2004 through 2007—core inflation will rise faster than headline figures. The increased demand for non-energy goods generates additional income for businesses. That leads to higher productivity and wages for workers. It causes the overall price level to increase even though most goods haven’t gone up in cost (or have become cheaper).
US Core Inflation is calculated monthly
The Federal Reserve uses core inflation to help decide monetary policy. The core inflation rate is calculated monthly.
Most economists agree that a reasonable core inflation rate for the US is 2-3% annually. Achieving that goal is a lot trickier than it seems, though.
Core inflation is a more accurate measure of the cost of living in the US. It captures what consumers pay for goods and services. Regular inflation includes food and energy prices that are volatile and tend to rise or fall based on supply and demand. Those fluctuations don’t necessarily happen because they’re getting more expensive.
Why it’s essential to have a reasonable core inflation rate
When prices increase at an acceptable pace, people feel they can afford their necessities but not much else. However, when prices increase too fast—because of energy costs—it makes life difficult for many Americans because these items are necessary for survival.
A healthy economy needs consumers with money left over after paying all their bills. Otherwise, businesses cannot sell enough products or services to keep growing their business and hiring new employees.
Good inflation isn’t bad for an economy. It can be a good thing
Why? Let’s examine why inflation may positively affect the economy and your finances.
- When prices go up, your money buys more goods and services.
- Higher price levels make it easier to pay off debts with cheaper dollars.
- It decreases the value of future payments (e.g., loans).
Core inflation is a more accurate measure of inflation
Core inflation is a more accurate measure of inflation than regular inflation. Regular inflation tends to be higher and less consistent, meaning it’s not as helpful in forecasting economic growth. It can be misleading when you’re trying to determine whether the economy is overheating or not.
On the other hand, core inflation is a much more consistent measure of price increases. It’s less likely to see wild fluctuations from month to month due to seasonal factors like fluctuations in energy costs or changes in weather patterns.
As you can see, core inflation is a much better measure of inflation than regular inflation.
It’s more accurate and better reflects the actual cost of living in the US. Many economists agree that 2-3% annual inflation is a reasonable target for the US economy. The big question is whether policymakers can meet those expectations.