What is Core CPI?

Published by Thomas Herold in Economics

'Core CPI' is explained in detail and with examples in the Economics edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

Core CPI refers to the Consumer Price Index. This term revolves around the idea of core inflation. It reveals the longer term price trend in a given item or economy. Core CPI is a means of measuring inflation which leaves out some specific items, particularly those that experience volatility in their pricing. There is a reason for excluding these items. To learn what long term inflation actually is, volatility in prices over the short term and temporary price changes have to be eliminated.

Core inflation is most typically figured up by using the core CPI. This takes out some products like food and energy items, especially oil and gas. Both of these categories may experience short term price changes. Such short term shocks often differ from the bigger picture trend in inflation and provide a false reading of it.

There is another way of calculating core CPI. This is called the outlier method. This way of figuring core inflation takes away products that show the biggest price movements. Many of these items’ prices fluctuate rapidly in commodity markets when speculators trade them for profit. Since their prices do not reflect actual alterations of supply and demand, it can make sense to exclude them.

The government is very concerned about which method of measuring inflation it uses. The Federal Reserve decided to switch from CPI to the PCE Index back in January of 2012. They prefer PCE because it offers trends in inflation which are less dramatically impacted by changes in short term prices. Different agencies find other ways to get to what they believe are more accurate means of measuring inflation.

The BEA Bureau of Economic Administration is concerned with eliminating those short term price changes that speculators and traders cause. To get around this, the BEA works with the gross domestic product numbers that already exist and calculates price changes from it. It then takes the monthly release of Retail Survey numbers and measures them against the CPI data-provided consumer prices. The BEA eliminates irregular fluctuations in the inflation data this way and gains more accurate long term trend information.

Determining core CPI inflation is important. It reveals the correlations between goods and services with their prices and the purchasing value of the general income of consumers. Should the costs of goods and services go up in a given time frame while the consumers’ parallel income levels do not rise, the buying power of consumers is weakening. This is because their money’s actual value is declining when measured against the costs of critical goods and services.

The process could be virtuous as well. Sometimes inflation occurs only on the income of consumers while the costs of goods and services remain constant. In this case, consumers gain greater purchasing power. This means that they will be able to buy an additional amount of the identical services and goods. Asset inflation can also benefit consumers. If the price of their house or the value of their investment portfolio goes up, the consumer has additional buying power also.

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The term 'Core CPI' is included in the Economics edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.