Definition of core inflation
What is core inflation?
Inflation is a measure of the level of general price increase that does not take into account certain expenditure items in the calculation. The objective is to have a seasonally adjusted approach that is not impacted by the State's policy.
Inflation rates exclude the most volatile elements such as oil or food products (dairy products, meat, etc.). These elements are very sensitive to changes in supply and demand and can therefore experience upward or downward peaks that disrupt the reading of the inflation level.
Core inflation also excludes expenditure items related to government intervention. This is the case, for example, with energy prices (electricity and gas), which are regulated prices.
In the end, core inflation tries to neutralise the effects of government policy (taxes or measures) which can have a significant impact on the prices of certain products consumed by households (e. g. tobacco). The objective of core inflation is therefore to eliminate the impact of a VAT increase/decrease or any measure that disrupts the reading of the inflation level.
Calculation of core inflation
The core inflation rate is calculated using the Consumer Price Index (CPI) excluding food and energy. This is called core CPI.
It is also possible to calculate core inflation on production prices. We then use theproducer price index(PPI) excluding elements forming part of the food and energy supply. This is called core PPI.
Interpretation of core inflation
Core inflation provides an idea of the underlying trend in price developments in a country or geographical area. It is a more relevant indicator than inflation for measuring inflationary pressures. Effectively, it is not subject to changes in external factors that cannot be controlled by monetary authorities.
Core inflation is also used as a reference by central banks when deciding on the monetary policy to be adopted, and in particular changes in the money supply (currency in circulation).