Educational Insight: What's The Difference Between Headline CPI & Core CPI?
This video demonstrates the difference between a headline CPI print and a core CPI print.
----
We interpret and explain price moves in real-time, 24 hours a day. Our team of analysts produce text, video and audio commentary.
You understand the markets and trade with confidence. Learn more at our website here: https://financialsource.co
-----
The difference is is really quite simple between the two, as you know looking at something like the consumer price index it's a whole range of items, you know, ranging from things like food, things like transportation, housing and within every one of these main categories like food, like housing you of course will have many sub-components as well.
So for example, if you take a look at something like apparel underneath that, you have things like footwear you have things like men's shirts and sweaters, for example. It's a whole range a very big basket that's used for that consumer price index. Now, if you take a look at this pie chart this pie chart basically shows you how these various categories are currently weighted with the latest update done in December, 2020. And even though something like housing, for example is by far the biggest component of the basket it's not really a very volatile component of prices at least during normal times.
If you take a look at the examples from last year with COVID, of course there's these very big distortions here and in a in a normal year, so to speak, you know, you don't see a lot of price changes, fluctuations in things like housing things like medical care and education, et cetera, apparel. But the two things that can be very volatile of course is things like food and things like transportation, within transportation you also have, of course, energy.
Now think about why this here is right. If you take a look at something like food, imagine that you have a, a huge drought in one specific year and it means that you have a huge a supply constraint in agricultural goods. Whatever that may be, that of course will affect prices for that particular year pushing prices higher.
Now, imagine the next year you have a huge, huge massive rainy season. That means that you have an oversupply of those goods pushing those prices lower. There's going to be a huge distortion from year to year from the previous year to the current year based on those climate issues.
So in that sense, food prices can be very volatile from year to year, from month to month. Similarly, looking at something like energy and oil imagine that you have OPEC coming out tomorrow announcing that they have they're going to put in a huge production cut. That's obviously going to push prices higher this month and that'll reflect as a distortion next month just because inflation might be shooting up with a percentage or two based on that oil price move.
It doesn't really reflect a real increase of one or two percent in the total basket, it's just that energy prices saw a huge push to the upside for, for an example. So for that reason, in order to strip out the noise from these more volatile components like food and energy that's where your core CPI comes in So your Core CPI is basically just normal CPI, that total basket but excluding food and energy prices.
So some countries actually have measures that also strips out the backup in some majors, like we can see in the in the EU data, they have normal core CPI but they also have a core CPI excluding tobacco as well. Now, the idea is being that, you know, if you take a look at a CPI basket, if you exclude food and energy that will potentially give you a true and a more accurate reflection of what underlying CPI is really like. And that is why central banks prefer to use this as a more stable measure in the inflation targeting because it strips out a lot of that noise.
Now, if you quickly go back to that chart, the BLS chart or BLS website, there's another one I want to show you. Just to, just to, just to put this into context. So on this chart, you can see two measures. You have the all items which is just your normal headline CPI. That one, of course came in at four spot 2% with the April, 2021 print. And then you have the core one, which came in at 3%.
So your headline CPI and your normal CPI prints basically just your total basket. And then you have your core measure which is your all items, less food and less energy.
-----
If you find this content helpful, you’ll love Financial Source.
There’s a link below were you can learn more about it
https://financialsource.co
----
We interpret and explain price moves in real-time, 24 hours a day. Our team of analysts produce text, video and audio commentary.
You understand the markets and trade with confidence. Learn more at our website here: https://financialsource.co
-----
The difference is is really quite simple between the two, as you know looking at something like the consumer price index it's a whole range of items, you know, ranging from things like food, things like transportation, housing and within every one of these main categories like food, like housing you of course will have many sub-components as well.
So for example, if you take a look at something like apparel underneath that, you have things like footwear you have things like men's shirts and sweaters, for example. It's a whole range a very big basket that's used for that consumer price index. Now, if you take a look at this pie chart this pie chart basically shows you how these various categories are currently weighted with the latest update done in December, 2020. And even though something like housing, for example is by far the biggest component of the basket it's not really a very volatile component of prices at least during normal times.
If you take a look at the examples from last year with COVID, of course there's these very big distortions here and in a in a normal year, so to speak, you know, you don't see a lot of price changes, fluctuations in things like housing things like medical care and education, et cetera, apparel. But the two things that can be very volatile of course is things like food and things like transportation, within transportation you also have, of course, energy.
Now think about why this here is right. If you take a look at something like food, imagine that you have a, a huge drought in one specific year and it means that you have a huge a supply constraint in agricultural goods. Whatever that may be, that of course will affect prices for that particular year pushing prices higher.
Now, imagine the next year you have a huge, huge massive rainy season. That means that you have an oversupply of those goods pushing those prices lower. There's going to be a huge distortion from year to year from the previous year to the current year based on those climate issues.
So in that sense, food prices can be very volatile from year to year, from month to month. Similarly, looking at something like energy and oil imagine that you have OPEC coming out tomorrow announcing that they have they're going to put in a huge production cut. That's obviously going to push prices higher this month and that'll reflect as a distortion next month just because inflation might be shooting up with a percentage or two based on that oil price move.
It doesn't really reflect a real increase of one or two percent in the total basket, it's just that energy prices saw a huge push to the upside for, for an example. So for that reason, in order to strip out the noise from these more volatile components like food and energy that's where your core CPI comes in So your Core CPI is basically just normal CPI, that total basket but excluding food and energy prices.
So some countries actually have measures that also strips out the backup in some majors, like we can see in the in the EU data, they have normal core CPI but they also have a core CPI excluding tobacco as well. Now, the idea is being that, you know, if you take a look at a CPI basket, if you exclude food and energy that will potentially give you a true and a more accurate reflection of what underlying CPI is really like. And that is why central banks prefer to use this as a more stable measure in the inflation targeting because it strips out a lot of that noise.
Now, if you quickly go back to that chart, the BLS chart or BLS website, there's another one I want to show you. Just to, just to, just to put this into context. So on this chart, you can see two measures. You have the all items which is just your normal headline CPI. That one, of course came in at four spot 2% with the April, 2021 print. And then you have the core one, which came in at 3%.
So your headline CPI and your normal CPI prints basically just your total basket. And then you have your core measure which is your all items, less food and less energy.
-----
If you find this content helpful, you’ll love Financial Source.
There’s a link below were you can learn more about it
https://financialsource.co
