What is Core Inflation?

If you follow economic news, you may have noticed concerns about rising gas prices and food costs (although the last several days on the commodity markets suggest that these prices may be on the brink of falling). Yet economic experts from across the spectrum promise that inflation is not a major worry. Since Americans spend a significant portion of their income on food and energy costs, inflation likely seems to them like a major worry. So why do economists ignore these volatile costs in calculating whether inflation is "worth worrying about"?

The United States Federal Reserve -- the central bank of the United States responsible for managing inflation -- prefers to use a measure of inflation that excludes food and energy precisely because these costs are so volatile. As tradable commodities, they are subject to short term price fluctuations that are of little value in predicting what prices will do in the future. In other words, you can't trust yesterday's oil or food prices to predict tomorrow's. The graph from the Federal Reserve Bank of Boston shows the extent to which energy inflation since the mid 1980s has been irrationally erratic and failed to track broader inflation.


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