Core Inflation Explained: What Food and Energy Exclusions Do

Core inflation is a measure of price changes that leaves out food and energy. It is published alongside the headline figure in both of the main U.S. consumer inflation reports: the Consumer Price Index (CPI) from the Bureau of Labor Statistics (BLS) and the Personal Consumption Expenditures (PCE) price index from the Bureau of Economic Analysis (BEA). The idea is to strip out the categories most likely to jump around from month to month and to show what is happening to prices more broadly.

The exclusion is a statistical convenience, not a claim that food and energy do not matter. Households buy groceries and fuel every week. The reason for the exclusion is forecasting: prices for these items are often driven by weather, crop yields, geopolitical events and commodity markets, which may reverse quickly and say little about inflation in the rest of the economy.

In brief

• Core CPI is formally the index for “all items less food and energy”; core PCE is the PCE price index excluding food and energy.
• The BLS does not give “core” a formal definition as a measure of underlying inflation; it notes that many users look at the series for that purpose.
• Core is a tool for judging trend, not a better measure of the cost of living.
• Some analysts prefer other trend measures, such as median or trimmed-mean series, which exclude different items each month.

What is left out, and why

Food and energy are the two groups most often removed. In the CPI, food covers items bought at grocery stores and restaurants. Energy covers fuels and utilities, including gasoline, fuel oil, electricity and natural gas. All of these are bought frequently, which means households notice changes in their prices quickly and which is also why they get so much attention in the news.

The BLS says on its CPI questions and answers page that some users focus on the all items less food and energy index because food and energy prices are volatile and they want a view of the underlying rate of inflation. That wording is deliberately modest. The BLS publishes the series; users decide what to infer from it.

Volatility is the central argument. A hurricane can disrupt refinery output and send gasoline prices up for weeks. A drought can affect crop prices. A change in oil supply can move prices at the pump within days. If a policymaker or a forecaster reads these swings as a lasting change in the inflation trend, they may react to something that is about to reverse. Core inflation reduces the risk of that mistake.

How core is calculated

The mechanics are simple. The BLS builds the CPI from price quotes in more than 200 categories grouped into eight major groups. To produce core, it removes the food and energy components from the all items index and recomputes the index from the remaining categories, using their relative weights. The BEA does the same for the PCE price index. The result is an index that covers most of the remaining basket: housing, apparel, transportation services, new and used vehicles, medical care, recreation, education and communication, and other goods and services.

Because each category keeps its weight in the remaining basket, the biggest piece of core is typically housing. Core goods, such as vehicles, furniture and clothing, and core services, such as rent, medical care and transportation services, are often analyzed separately. Economists find the split useful because goods and services respond to different forces. Goods prices are tied to supply chains, import costs and the exchange rate. Services prices lean more on labor costs and the housing market.

Why the Federal Reserve watches it

The Federal Reserve has a statutory mandate to promote maximum employment and stable prices, and the Federal Open Market Committee (FOMC) has said that inflation of 2 percent over the longer run is consistent with that mandate. Because monetary policy acts with a delay, the Committee needs to judge where inflation is heading, not only where it has been. Core inflation helps because it is thought to be a better predictor of future headline inflation than the headline figure itself, at least over the near term.

Fed officials have also said that they look at the headline measure, since it is what people experience. In practice they discuss both. A rise in headline inflation that is entirely due to energy can be treated as a temporary shock, as long as it does not feed into expectations or into wages and prices elsewhere. If core inflation also begins to rise, that suggests the pressure is spreading. The FOMC’s statements and minutes, which are published on federalreserve.gov, show how the Committee describes the relationship in each period.

What core can miss

The weaknesses of the measure follow from the same logic as its strengths.

Food and energy are not always noise. When energy prices rise and stay high for years, they raise costs for transportation, manufacturing and utilities, and those costs eventually find their way into the prices of other goods and services. Leaving energy out of the index in a period like that can understate the inflation people feel and can delay the signal that costs are broad-based.

Excluded does not mean unimportant. Food and energy account for a meaningful share of the budget, especially for lower-income households, who spend a larger fraction of income on necessities. The headline CPI therefore better reflects their experience than core does.

The exclusion is fixed. Food and energy are always removed, whether or not they were unusually volatile in a given month. Other items, such as airfares, used cars or hotel rates, can also be volatile but remain in core. Some analysts therefore track alternative measures that exclude whichever components moved the most in a given month. Examples include trimmed-mean and median inflation measures published by some regional Federal Reserve Banks. These methods trade simplicity for flexibility.

Seasonal and base effects still apply. Core is not immune from distortions. A year-over-year change can be pushed up or down by what happened twelve months earlier, even if recent monthly changes look different.

Reading a monthly release

When the BLS publishes the CPI each month, the report lists the headline change and the core change for the month and for the past twelve months. A few habits make the numbers easier to interpret.

First, compare the monthly core reading with the pace of recent months, not only the twelve-month figure. The twelve-month number moves slowly, because it averages the past year. The monthly figure shows the latest pace but is noisier.

Second, look at the components. If a rise in core comes mostly from one category, such as a spike in vehicle insurance or airfares, it may be less broad than a rise spread across many categories. The tables in the release show each category’s contribution.

Third, check whether the figures are seasonally adjusted. Monthly changes are usually quoted on a seasonally adjusted basis, while annual changes are usually quoted unadjusted.

A worked example

Take a basket with three parts: gasoline at 10 percent of spending, rent at 40 percent and all other items at 50 percent. Over a month, gasoline prices rise 6 percent, rent rises 0.4 percent and other items rise 0.2 percent. The headline index changes by 0.1 times 6, plus 0.4 times 0.4, plus 0.5 times 0.2, which is 0.6 plus 0.16 plus 0.1, or 0.86 percent.

Core drops gasoline and reweights the rest. Rent now carries 40 out of 90, about 44 percent, and other items 50 out of 90, about 56 percent. Core rises by roughly 0.444 times 0.4 plus 0.556 times 0.2, which is about 0.29 percent. The headline figure suggests a sharp jump; the core figure suggests a modest one. Whether the jump in gasoline is a one-off or the start of a trend is the question the reader still has to answer, and core alone does not settle it.

Where to find the data

The BLS publishes both the headline and the all items less food and energy indexes in each monthly CPI report on bls.gov, and the BEA publishes the PCE price index and the version excluding food and energy in its personal income and outlays release on bea.gov. Both agencies provide long historical series, which can be downloaded for charting or analysis. The Federal Reserve Banks of Cleveland and Dallas, among others, publish alternative trend measures.

FAQ

What is the difference between core CPI and core PCE?

Core CPI is the BLS’s index for all items less food and energy. Core PCE is the BEA’s PCE price index excluding food and energy. They differ in weights, formula and scope, so their readings often differ.

Why exclude food and energy specifically?

Their prices are volatile and driven by factors such as weather and commodity markets that may not reflect broad price pressure. The BLS notes that some users focus on the series for that reason.

Does the Fed ignore food and energy prices?

No. The Fed’s goal is stated for overall inflation, and officials discuss both headline and core readings. Core is used as a guide to the trend.

Is core inflation the same as underlying inflation?

Not exactly. Core is one proxy for underlying inflation. Other proxies, including median and trimmed-mean measures, use different methods.

Why do my grocery and gas bills seem to rise faster than core?

Because core leaves them out. If your spending is concentrated in food and fuel, your experienced inflation may differ from core, and may differ from the headline average as well.

Where is core inflation published?

In the monthly CPI report on bls.gov and in the personal income and outlays report on bea.gov.