Core inflation

Core inflation represents the long run trend in the price level. In measuring long run inflation, transitory price changes should be excluded. One way of accomplishing this is by excluding items frequently subject to volatile prices, like food and energy.

History

The concept of core inflation as aggregate price growth excluding food and energy was introduced in a 1975 paper by Robert J. Gordon. This is the definition of "core inflation" most used for political purposes. The core inflation model was subsequently developed and advocated by Otto Eckstein, in a paper published in 1981. According to the economic theory historian Mark A. Wynne, "Eckstein was the first to propose a formal definition of core inflation, as the 'trend rate of increase of the price of aggregate supply.'”

Usage

The preferred measure by the Federal Reserve of core inflation in the United States is the change in the core personal consumption expenditures price index (PCE). This index is based on a dynamic consumption basket. Economic variables adjusted by this price deflator are expressed in chained dollars, rather than the alternative constant-dollar measure based on a fixed goods' basket.