St. Louis Fed, Report: What Do Components of Key Inflation Measures Say about Future Inflation?

“If you follow speeches by members of the Federal Open Market Committee (FOMC), you will hear references to both “headline” and “core” household inflation. The former refers to a measure of inflation that is based on a weighted basket of goods and services from all household spending categories. The latter typically refers to a measure of inflation that is based on the same representative basket except for food and energy.”

“To many consumers, core inflation may seem like a ridiculous concept, since food and energy (e.g., gasoline) are two of the most common categories of items they purchase. Why, then, would central bankers even consider such a measure of inflation?”

“The primary argument for following a core measure of inflation is that it provides a clearer picture of the direction in which inflation is headed. The premise is that food and energy prices are volatile, which makes the headline measure a poor indicator of future inflation; therefore, monitoring core inflation is a better idea …”