Friday, June 15, 2007

Core Inflation

Someone asked in comments why the press seems to focus on the "core inflation" number, which excluded food and energy prices, instead of the overall inflation rate. This really isn't some grand conspiracy, it's just that these numbers get reported in the business press whose audience isn't especially concerned with the price of food and energy, but instead concerned with how this news will impact "the markets" and Fed policy. Food and energy prices are volatile, and stripping them out of the month-to-month inflation numbers is supposed to provide a better idea of what the underlying inflation trend is. Longer term the focus is on the overall inflation rate and not the core rate.

Basically, the month to month rate is noisy, so the idea is to try to strip out a big component of that noise to get a better sense of the signal.