What is core inflation?
Core inflation is a measure of of the underlying inflation trends in the economy. It should be noted that the Reserve Bank of New Zealand (RBNZ) uses a range of core inflation measures in order to assess underlying inflationary pressures. However, certain volatile and temporary factors (such as food and energy prices) are usually excluded when determining core inflation.
Volatile factors (including seasonal variations) can distort the inflation rate and make it difficult to assess whether inflation is a result of temporary fluctuations, such as increased fresh fruit prices due to severe weather, or represents a sustained increase in prices.
Why is core inflation important?
Ultimately, core inflation is used to determine the impact of rising prices on consumer income, and can guide economic policy decisions.
What is headline inflation?
Headline inflation, also known as overall inflation or consumer price index (CPI) inflation, is a measure of the average price for goods and services. It represents the total inflation rate experienced by consumers and businesses, and is often reported in the news as the headline inflation rate.
Unlike core inflation, headline inflation includes the price changes of all goods and services, regardless of whether they are considered volatile or stable. This means that it includes factors like changes in food and energy prices.
While headline inflation provides a fairly comprehensive view of overall price movements, it may not always reflect the underlying, long-term inflationary trends in an economy because it can be influenced by temporary factors.
Why is headline inflation important?
Headline information is important for several reasons:
- Economic monitoring: it helps monitor the overall inflationary environment in an economy and assess the impact on consumers’ purchasing power
- Policy decisions: central banks and governments use headline inflation data to make decisions about monetary policy, fiscal policy, and other economic interventions
- Wage and salary adjustments: workers often negotiate for wage increases based on the headline inflation rate to ensure their salaries keep up with rising living costs
- Investment and financial planning: investors and businesses use inflation data to make investment decisions and plan for future expenses and revenues
- Consumer behavior: rising headline inflation can influence consumer behavior, including spending habits and savings choices
What’s the difference between core inflation and headline inflation?
As mentioned earlier, the main difference between core and headline inflation is the factors included in determining inflation rates. Core inflation excludes volatile and temporary price changes, whereas headline inflation does not.
How core inflation is different to headline inflation:
- It focuses on underlying trends: by excluding variable elements, core inflation provides a stable and consistent measure of inflation that reflects long-term inflationary trends in the economy
- Used for policy analysis: central banks and policymakers often rely on core inflation to make monetary policy decisions because it helps them gauge the key inflationary pressures and trends without focusing on short-term fluctuations
How headline inflation is different to core inflation through:
- Comprehensive measure: provides a comprehensive view of the overall inflation rate experienced by consumers and businesses, taking into account all price changes
- Affected by short-term factors: because headline inflation includes variable components, it can be influenced by short-term factors like changes in oil prices or seasonal food prices
About the author of this page
This report was written by Canstar Content Producer, Caitlin Bingham. Caitlin is an experienced writer whose passion for creativity led her to study communication and journalism. She began her career freelancing as a content writer, before joining the Canstar team.