Core inflation

Core inflation represents the long run trend in the price level. In measuring long run inflation, transitory price changes should be excluded. One way of accomplishing this is by excluding items frequently subject to volatile prices, like food and energy. The concept of core inflation as aggregate price growth excluding food and energy was introduced in a 1975 paper by Robert J. Gordon. This is the definition of 'core inflation' most used for political purposes. The core inflation model was subsequently developed and advocated by Otto Eckstein, in a paper published in 1981. According to the economic theory historian Mark A. Wynne, 'Eckstein was the first to propose a formal definition of core inflation, as the 'trend rate of increase of the price of aggregate supply.'” The preferred measure by the Federal Reserve of core inflation in the United States is the change in the core personal consumption expenditures price index (PCE). This index is based on a dynamic consumption basket. Economic variables adjusted by this price deflator are expressed in chained dollars, rather than the alternative constant-dollar measure based on a fixed goods' basket. Previously the Federal Reserve had used the US Consumer Price Index as its preferred measure of inflation. The CPI is still used for many purposes, for example, for indexing social security. The equivalent of the CPI is also commonly used by central banks of other countries when measuring inflation. The CPI is presented monthly in the US by the Bureau of Labor Statistics. This index tends to change more on a month-to-month basis than does 'core inflation'. This is because core inflation eliminates products that can have temporary price shocks (i.e. energy, food products).Core inflation is thus intended to be an indicator and predictor of underlying long-term inflation.