Core inflation

Core inflation is the rate of price increase after removing food and energy, two categories whose prices change sharply for reasons such as weather, geopolitics or supply disruptions. It is calculated for both the Consumer Price Index and the Federal Reserve's preferred Personal Consumption Expenditures index.

The idea is that temporary swings in volatile prices obscure the underlying direction of inflation, so central bankers watch the core rate as a guide to how prices will behave in the near future and whether to adjust policy. It was developed in the 1970s as economists tried to separate persistent trends from one-time shocks.

Critics argue that excluding food and energy, which households must buy, understates the costs people actually face, and that the volatile items do not average out to zero: energy prices were part of the inflation experience of 2021 and 2022, for example. Some economists use alternative measures such as the trimmed mean or median CPI. The Fed targets overall inflation of 2 percent but considers core measures in its decisions on monetary policy and the federal funds rate. Together with headline inflation, it gives a fuller picture.