What Is Core Inflation?
Kurt Brouwer July 31st, 2007
Core inflation. Everyone talks about it, yet what exactly is it? And, is it going up or down? To start, core inflation adjusts the government’s standard inflation numbers to exclude two sectors (energy and food) that you don’t need [just kidding].
Actually, prices in these two sectors fluctuate a lot and, frequently, the fluctuation is seasonal so the government produces an inflation indicator that is more stable. In this report, Rex Nutting, Washington bureau chief at MarketWatch, sheds some light on the subject:
‘Core consumer inflation increased 0.1% for the fourth consecutive month in June, pushing the yearly gain in core inflation down to the lowest level in three years, the Commerce Department said Tuesday.
Following June’s gain, the core personal consumption price index had risen 1.9% in the past year, the lowest inflation since early 2004, and just within the Federal Reserve’s unofficial comfort zone of 1% to 2% for core inflation. Core inflation excludes volatile food and energy prices. Read the full government report.
Overall inflation also increased 0.1% in June, the lowest monthly inflation since November. Overall inflation is up 2.3% in the past year…’
OK. So, inflation seems to be in the 2% range for the past 12 months. But as soon as the experts agree on what inflation has done, they diverge in their views of what it means and where it is going. The MarketWatch report goes on:
“We continue to expect further disinflation,” wrote Goldman Sachs economists, but RBS Greenwich chief economist Stephen Stanley said core inflation would likely drift above the 2% comfort zone later this year, in line with the Fed’s own forecast…’
Hmm. So, Goldman Sachs sees disinflation–that is a lessening of inflation. But the economist from RBS Greenwich foresees higher inflation.The good news in these two seemingly divergent opinions is that inflation is pretty moderate. Whether inflation goes up a bit or down a bit from here, 2% annual inflation is good by historical standards.
The average annual inflation for the past 10 years (1997-2006) is just under 3%. That means that it would take about $130 to buy today what $100 bought in 1997.
If we go back further–to 1980–the average rate of inflation was well over 3%. For example, you would have to spend $253 today to buy what $100 would have purchased in 1980.
So, the inflation report is good, whether you look at core inflation or overall inflation. The policies the Federal Reserve has pursued for the past 20 years are excellent and we should applaud former Fed chair Alan Greenspan and current chair Ben Bernanke for a job well done.
Hat Tip: BrothersJuddblog
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