Core inflation

Date posted: September 15, 2011

Each month two different inflation rates are released by the government. One is the total inflation rate, and the other is the so-called core rate, which excludes price changes for food and energy. N.C. State University economist Mike Walden explains why we track inflation without including food and energy prices.

“Some people think this is kind of a plot by the government to hide what the real inflation rate is, but, seriously these two kinds of inflation rates have been released for a long time. And there can be big differences, for example, if we look at the July inflation rates and we express these on an annual basis, the total rate was 6 percent. The core rate was only 2.4 percent.

“The rationale for the core rate, which … excludes energy and food prices, is that those prices can be very volatile. They can be affected by the weather. They can be affected by disruptions in supply — for example, violence in the Middle East. And …. they can move up and down very rapidly. In fact, if we look at the total rate — which does include energy and food prices — it has bounced around a lot. The core rate has been much more stable.

“Now of course the counter-argument is, is that the total inflation rate is really what matters to households. We do eat, and we do use energy, so we ought to track those prices. The good news is that we can report both, and we can perceive if both are going in the same direction.

“And actually if you look over the last year, the total rate has been moving up. So, too, has the core rate. So they’re really telling us the same thing.”

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