What is the difference between headline inflation and core inflation?

Headline inflation and core inflation are two measures used to track changes in the overall price level of goods and services in an economy, but they differ in terms of what they include and how they are calculated.

Headline Inflation: This measures the overall inflation rate including all goods and services within the consumer basket. It reflects changes in the prices of goods and services commonly purchased by consumers, such as food, housing, transportation, and energy. Headline inflation can be influenced by factors like changes in commodity prices (such as oil), taxes, and government subsidies. It gives a broad picture of price movements in the economy.

Core Inflation: Core inflation, on the other hand, excludes volatile items from the consumer basket, such as food and energy prices, which can be subject to significant short-term fluctuations due to factors like weather, geopolitical events, or supply disruptions. By excluding these volatile components, core inflation aims to provide a more stable measure of underlying inflation trends. Core inflation is considered a better indicator of long-term inflationary pressures because it filters out temporary price shocks.

In summary, while headline inflation gives a comprehensive view of overall price movements in an economy, core inflation focuses on the underlying trend by excluding volatile components. Both measures are important for policymakers and economists to understand the dynamics of inflation and make informed decisions regarding monetary policy and economic management.

Lauren Hua is a private client adviser at Fairmont Equities.

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