What It Measures
Core CPI removes food and energy components from the headline CPI to provide a cleaner read on underlying inflation trends. Food and energy are excluded because:
- Energy prices are highly volatile due to geopolitical events, weather, and global supply/demand
- Food prices can swing due to weather, disease outbreaks, and commodity speculation
Core CPI better reflects domestic demand-driven inflation and is less influenced by temporary supply shocks.
Why It Matters
Policy Focus: The Fed often emphasizes core inflation measures because they better predict future inflation trends.Trend Indicator: Core CPI shows whether inflation is becoming embedded in the economy or is temporary.Services Inflation: Core CPI is heavily influenced by services (especially housing), which tend to be stickier than goods prices.
How to Interpret
Compare to Headline: If core is significantly below headline, volatile components are driving inflation. If core exceeds headline, underlying inflation is elevated.Shelter Component: Housing costs make up about 40% of core CPI and have been the primary driver of elevated core inflation recently.Super-Core: Some analysts focus on "super-core" (core services excluding housing) for an even cleaner signal.
Key Levels to Watch
| Level | Interpretation |
|---|---|
| Below 2% YoY | Underlying inflation subdued |
| 2-3% YoY | Manageable core inflation |
| 3-4% YoY | Elevated core inflation, policy concern |
| Above 4% YoY | Persistent inflation problem |