Core Inflation

Core Inflation measures inflation, excluding some items whose prices confront unstable movements and fluctuations. Core Inflation normally do away with the products and items which may be influenced by transitory prices. This is due to the fact that these unstable, temporary prices have a tendency to deviate from the general trend of inflation, and measure inflation incorrectly.

Core inflation is considered to be an indicator of long-term inflation at the fundamental level. Normally, such inflation is calculated by taking into consideration the normal Consumer Price Index, and eliminating items like food products and energy from the list. However, there are other methods of calculating Core Inflation, like that of the Outliers Method, which excludes products undergoing the highest price changes.

Origin of the concept of Core Inflation:

The origin of the concept of Core Inflation as a collective price growth (minus energy and food items) first appeared in the paper written by Robert J. Gordon in 1975. However, the definition of Core Inflation as published in the paper is mostly used in politics.

How to measure Core Inflation?

The oldest and the most common and preferable way of measuring Core Inflation was the Consumer Price Index, as was widely prevalent in the United States of America. However, Consumer Price Index also remains an indicator of inflation in many countries across the globe in present times as well.

Consumer Price Index has a changing tendency on a monthly basis, more than the Core Inflation. This is due to the fact that Core Inflation excludes products like food ingredients, energy, etc. influenced by temporary prices. This is precisely why Core Inflation is termed and identified as both the predictor and indicator of basic long-term inflation.

Some recent fact and figures about Core Inflation:

Mentioned below, are some figures related to Core Inflation, as per the year-over-year data available in December, 2006:

• Core Inflation: 2.7%
• Overall Consumer Price Index: 2.1%