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Consumer Price Index vs. “Core” Inflation

by Miranda Marquit

We just received the latest report on CPI, which indicates that prices went up in February. Inflation is something that affects all of us; it erodes the value of your money. Indeed, when prices go up, your purchasing power goes down. When wages are stagnant (as they are now), inflation can be even more of a problem. As prices rise, many expect monetary policy makers to do something about it. However, policy makers don’t rely on CPI for their decisions. Instead, many concern themselves with “core” inflation — which is a different matter.

CPI: A Brief Overview

Consumer Price Index vs Core Inflation

The cost of goods and services almost always rises.

It can help to understand the difference between CPI and “core” inflation. The Consumer Price Index is represented by “CPI”. This index is an indicator of the cost of living in the United States. Prices from right around 80,000 services and products are collected each month and then averaged together to come up with a monthly CPI. When the CPI rises — indicating that prices, on average, are rising — we have inflation. This measurement has a lot to do with the “cost of living.” Want to see it in action? Check out this consumer price index inflation calculator to see how the purchasing power of a dollar decreases over time.

What is “Core” Inflation?

It’s not just about looking at the CPI, though. Different factors are broken out. The CPI categorizes products and services in a number of different ways, including education, food, housing, clothing, medical services, transportation, energy and more. When figuring “core” inflation, certain categories are removed from the equation. Food and gas prices, for example, are removed from the CPI measure to provide a different picture. With food and gas prices removed, “core” inflation is often quite low (or non-existent).

Why “Core” Inflation Upsets People

One of the reasons food and gas prices are left out of the measure of “core” inflation is because they are a bit more volatile than the prices of other categories. In order to get a smoother trend line for monetary policy purposes, analysts use “core” inflation. However, for regular folks, the situation doesn’t always reflect what is actually happening in their lives.

Think about what is most likely to impact you on a daily basis. It’s probably food prices and gas prices. With food prices inflation higher than its been for a while — and expected to increase through 2011 — people are feeling the pinch. And, of course, gas prices affect the wallet as we commute to work and run errands. On a practical basis, the very things that are left out of “core” inflation are the things that most erode our ability to get more bang for our buck.

When policy makers consider whether or not it’s time to make efforts to adopt measures to slow inflation, they often look at “core” inflation. Which means that policies meant to stimulate the economy through price inflation are kept in place. Even though regular folks feel the pinch of rising prices in their budgets.

What Can You Do?

As inflation erodes your purchasing power, it becomes necessary to take steps to protect yourself. Some people preserve their capital with inflation protected securities. Others look for gains in the stock market and other markets to help them overcome the ravages of inflation. It’s also possible to start a business, cultivate passive income, and even buy items with a long shelf life at today’s prices to help reduce their average costs over time.

What do you think should be a measure of inflation? And what do you do to combat inflation?


Published or updated December 12, 2012.
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{ 4 comments… read them below or add one }

1 krantcents

Inflation to me represents increases in a basket of items I purchase all the time including food and gas. I realize these items are too volatile, but when they trend higher and stay there, it should be counted as inflation.

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2 K.C.

We continue to use the Buy On Sale and Stock Up strategy for food purchases and household items. We’ve implemented “NO DRIVE” days in an effort to reduce our driving and make the driving we must do more efficient. We are careful to properly maintain those things we already own and recycle and re-purpose what we can to avoid making additional purchases where possible.

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3 Debt Donkey

The elements that make up “core” inflation are the ones most meaningful to people, and should be the real measure of inflation. Long term food storage and precious metals are simple ways to help ease the pinch, but as inflation effects so many things I think it will be tough to beat in the coming months and years. If it really takes off our collective standard of living is bound to go down. I think getting out of debt will be a HUGE help. This is a very informative article that simplifies an otherwise complicated topic. Thanks!

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4 Ryan

The volatility they are saying should be ignored in the core CPI is the real world, in-the-trenches inflation. Instead of ignoring the real world situation by leaving out energy and food, why not include them and stop micromanaging money by stepping in all the time. Couldn’t they be causing much of that volatility by acting on incomplete data? Of course I subscribe to the Austrian school, and am against the feds very existence… But if they are going to continue as an institution, shouldn’t they be the rational actors that Keynes and so many others talked about? It’s the institutional equivalent of willful ignorance to just ignore your own data, especially when energy costs so strongly influence the costs of all the other items in the CPI basket.

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