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Taking A Look at Headline and Core Inflation. What Is the Difference?

Inflation has reached a 40-year high, and Americans are feeling it. With crude oil up nearly 50% YTD and groceries costing 10% more than they did a year ago, the fear of a recession quickens.

However, it is important to note that prices in the food and energy sector are highly volatile—the frequency and magnitude of the price changes are higher than average. As a result, many economists use what is known as “core inflation” to measure the change in the cost of goods and services.

Core inflation is an important analytical tool because it omits the most volatile items (i.e., energy and food) whereas headline inflation is not adjusted for volatile figures. Shown below is a graph of headline and core inflation.

Monetary policy influences inflation and should remain stable overtime. Since headline inflation is more volatile, it cannot be used to calculate inflation trends. In turn, a core measurement can be a good predictor of future inflation trends.

Some analysts believe inflation has reached a peak based off the core measurement. It's still difficult to tell if we're seeing the light at the end of the tunnel—or an oncoming train. You can stay up to date on current CPI by visiting: https://www.bls.gov/cpi/

Kylee.Robertson@Valpo.edu

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