Headline Inflation

By: EconomyWatch   Date: 14 October 2010

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Headline inflation reflects the extent to which the prices of all goods and services in an economy have risen in a given period. Headline inflation rate is a measure of the rate at which the cost of living in an area has increased. Headline inflation is not an accurate representation of the underlying rate of inflation, since it takes into account food and energy prices which are highly volatile in nature. Therefore, for the purpose of formulating monetary policy, economists generally do not consider headline inflation. Headline inflation is also known as top-line inflation.

Suitability of Headline Inflation

Headline inflation can be used to compare purchasing power over two time periods. It can be used to compare wealth, wages,rate of return, government transfers, including Social Security payments, as these variables depend on the broader measure of inflation.

Factors driving Headline Inflation

The major factors responsible for headline inflation are:

  • Rise in the prices of food products: In developing and agro-based economies, a rise in the prices of food items magnifiesheadline inflation.

 

  • Rise in oil prices: Headline inflation is fueled by a rise in crude prices. A number of economies suffered high headline inflation when crude oil prices reached record highs and remained at elevated levels during 2008.

Arguments for Headline Inflation

The Federal Reserve pays more attention to core inflation than headline inflation, as the former excludes the volatile foodand energy prices. However, it is headline inflation in comparison to income growth that determines whether and to what extentthe standard of living of the people in an economy is improving or deteriorating.

Another argument for headline inflation is that, if the price of an excluded item remains elevated for a longer period, the headline inflation rate deviates significantly from the core measure for an extended duration.

Calculation of Headline Inflation

Headline inflation is generally expressed on an annualized basis. A monthly figure of 5% inflation means that if the monthly rate continues for 12 months, it would result in 5% inflation for the year. Comparisons of headline inflation are usually madeon a year-over-year basis.


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