Measuring Inflation: The Core is Rotten

Abstract

ontrolling overall inflation is a goal of monetary policy.Measures of overall, or headline, inflation attempt to include changes in the prices paid for a wide variety of goods-that is, what households actually have to pay for their daily purchases.This is a sensible notion of precisely what the central bank can and should control over the medium term.Many discussions of monetary policy, even within the central banking community, discuss movements of subsets of prices instead of the overall or headline measure of price changes.The most famous subset is the "core"-all prices except those relating to food or energy.Core inflation is the measured rate of increase of these prices. 1 Control of core inflation is not the goal of monetary policy, although it sometimes seems to be, given the amount of emphasis put on this concept in the United States.Many of the old arguments in favor of a focus on core inflation have become rotten over the years.It is time to drop the emphasis on core 1 Figures 1 and 2 show core and headline inflation for the consumer price index (CPI) and the personal consumption expenditures (PCE) chain price index.2 See, for instance, Mishkin (2007).

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