In this article, you will learn what is different between CPI and core CPI. Inflation is important to currency valuation because rising prices lead the central bank to raise interest rates out of respect for their inflation containment mandate. If actual data comes greater than forecasted then it is good for the US dollar. Markets anticipate flat to negative reading from both the data.
What is Different Between CPI and Core CPI?
CPI is the consumer price index. A measure of the cost of living for the typical person.
Core CPI is the CPI – energy and food prices. Energy and food prices are removed because they have a tendency to be highly volatile.
Core inflation is the change in the costs of goods and services, but it does not include those from the food and energy sectors. This measure of inflation excludes these items because their prices are much more volatile. It is most often calculated using the consumer price index (CPI), which is a measure of prices for goods and services.
If we look only at CPI, monetary authorities may be inclined to change interest rates more frequently. For example, in 2008. We had a rise in energy prices causing cost push inflation of 5%, a few months later we were in a deep recession .In other words, CPI can give a misleading impression of underlying inflationary pressures. If you tighten monetary policy because of temporary food and energy inflation, you create the potential for slowing down the economy. Similarly when there is a slump in energy and food prices , there is a danger monetary policy can become too lax, creating future underlying inflation.
It is true that consumers have to face rising food prices and rising energy prices. I don't suggest indexing linking pensions to Core CPI. This could give pensioners an increase in benefits less than their cost of living.
Why Are Food and Energy Prices Excluded?
Food and energy prices are exempt from this calculation because their prices can be too volatile or fluctuate wildly. Food and energy are staples, meaning demand for them doesn't change much even as prices rise.
For example, gas prices may rise with the price of oil, but you will still need to fill up the tank to drive your car. Similarly, you won't be putting off buying your groceries just because prices are rising at the store.
Also, oil and gas are commodities and are traded on exchanges where traders can buy and sell them. Food, too, is traded including wheat, corn, and pork.
The speculation of energy and food commodities leads to volatility in their prices, causing wild swings in the inflation figures. For example, a drought can cause dramatic effects on the prices of crops. The effects on inflation can be brief, meaning they ultimately correct themselves and the market returns to a balanced state. As a result, food and energy prices for these goods are excluded from the calculation of core inflation.
Bottom Line
If you are an economist, the data is important for you and you will have to keep up with the new data charts. CPI and core CPI are important too. This article will explain what is different between CPI and core CPI.
