Core inflation
Core inflation is an economic concept used to measure inflation that does not take into account changes in the price of certain goods. The core inflation rate excludes the prices for food and the energy sector from the calculation, as these are subject to greater fluctuations, the causes of which cannot be found within the economy under consideration.
There is no single model of a core inflation rate. In some cases, tobacco products and products with administered prices (e.g. “core inflation rate 2” from the Federal Statistical Office ) are also excluded from the shopping cart.
Reasons for Using a Core Inflation Rate
When selecting the shopping basket for calculating an inflation rate, an attempt is usually made to define a representative shopping basket in order to best describe the effect of inflation. In Europe, the harmonized index of consumer prices (HICP) is used for this.
However, individual aspects of inflation cannot be adequately represented with such an index:
Seasonal fluctuations
A number of product prices fluctuate with the season. This is particularly the case with food. This seasonal effect is superimposed on the “actual” inflation rate (“headline inflation”). There are two ways of eliminating this effect:
- Smoothing by means of averages (at the price that changes in the inflation rate are only shown delayed and weakened)
- Removal of groceries from the basket (concept of core inflation)
According to a study by the Federal Reserve Bank of New York, the concept of core inflation is better suited to measuring the “real” rate than using moving averages.
Energy price fluctuations
The prices for (mostly imported) energy sources (mainly crude oil, natural gas and coal) are also very volatile. In addition, over the course of a few quarters, these prices have an impact on the prices of other goods across the production chain.
This effect can also be corrected best by not taking energy costs into account in the shopping cart.
In particular, the effect of external price shocks (e.g. oil crisis ) can be described more easily with this measure.
This concept is criticized, however, because price increases for both energy and food are not only triggered by short-term external shocks or fluctuations, but - especially in recent years - correspond to a long-term trend. Core inflation does not take this effect into account, although a high percentage of citizens' expenditure is spent on energy and food.
Use and interpretation
EUROSTAT regularly calculates the core inflation rate as an HICP adjusted for the energy and food components . This is used by the ECB as an indicator when determining monetary policy measures .
In Switzerland, the Swiss National Bank uses a core inflation rate as the inflation rate excluding food, beverages, tobacco, seasonal products, energy and fuel.
The central banks' use of the core inflation rate is based on the assumption that temporary external price shocks and seasonal fluctuations should have no influence on the decision on monetary policy measures.
For the ECB, however, it is the development of the HICP and not the core inflation rate that is the decisive benchmark. Due to possible second-round effects, external price shocks are also likely to have lasting effects on inflation.
history
The model of core inflation as a price index without taking into account food and energy was first described in 1975 by Robert J. Gordon . It is the most widely used definition of core inflation.
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- ^ Robert Rich, Charles Steindel, " A Review of Core Inflation and an Evaluation of Its Measures, " Staff Report, Federal Reserve Bank of New York (2005).
- ↑ Core inflation Switzerland ( Memento of the original from January 1, 2011 in the Internet Archive ) Info: The archive link was inserted automatically and has not yet been checked. Please check the original and archive link according to the instructions and then remove this notice. (PDF; 52 kB).
- ↑ for example Axel A. Weber [1] .
- ↑ Gordon, Robert J., “Alternative Responses of Policy to External Supply Shocks” in: Brookings Papers on Economic Activity, Edition 6/1975, pp. 183-206.
Web links
- Deutsche Bank Research on core inflation rate (PDF file; 92 kB)