Definition
Headline inflation is a measure of the total inflation within an economy, including commodities such as food and energy prices, which tend to be much more volatile and prone to inflationary spikes. On the other hand, “core inflation” is calculated from a price index minus the volatile food and energy components. Headline inflation may not present an accurate picture of an economy’s inflationary trend since sector-specific inflationary spikes are unlikely to persist.
Headline Inflation
What is ‘Headline Inflation’
Headline inflation is the raw inflation figure as reported through the Consumer Price Index (CPI) that is released monthly by the Bureau of Labor Statistics. The CPI calculates the cost to purchase a fixed basket of goods, as a way of determining how much inflation is occurring in the broad economy. The CPI uses a base year and indexes the current year’s prices according to the base year’s values.
Explaining ‘Headline Inflation’
As it includes all aspects within an economy that experience inflation, headline inflation is not adjusted to remove highly volatile figures, including those that can shift regardless of economic conditions. Often, headline inflation is closely related to shifts in the cost of living, which provides useful information to consumers within the marketplace.
Negatives of Rising Inflation
Inflation is a threat to long-term investors because it erodes the value of future dollars, can stifle economic growth, and can cause a rise in prevailing interest rates. While headline inflation tends to get the most attention in the media, core inflation is often considered the more valuable metric to follow. Both headline and core results are followed closely by investors, and are also used by economists and central banking figures to set economic growth forecasts and monetary policy.
Core Inflation
Core inflation removes the CPI components that can exhibit large amounts of volatility from month to month, which can cause unwanted distortion to the headline figure. The most commonly removed factors are those relating to the cost of food and energy. Food prices can be affected by factors outside of those attributed to the economy, such as environmental shifts that cause issues in the growth of crops. Energy costs, such as oil production, can be affected by forces outside of traditional supply and demand, such as political dissent.
Further Reading
- Price level convergence and inflation in Europe – papers.ssrn.com [PDF]
- Optimal price indices for targeting inflation under incomplete markets – www.nber.org [PDF]
- Monetary credibility, inflation, and economic growth – heinonline.org [PDF]
- Inflation targeting in Chile – www.sciencedirect.com [PDF]
- Commodity prices and inflation dynamics – papers.ssrn.com [PDF]
- A time-series approach to test a change in inflation persistence: the Mexican experience – www.tandfonline.com [PDF]
