What is core inflation?

Core inflation refers to the rate of price increases in the economy after excluding food and energy costs, which tend to be volatile and driven by supply-side factors beyond the Fed's control. Core CPI and core PCE are the two primary core inflation measures, and they often tell slightly different stories due to differences in weighting and methodology.

The rationale for excluding food and energy is straightforward. Oil prices can swing 30% in a month due to geopolitical events or OPEC decisions, and food prices fluctuate with weather patterns and agricultural cycles. These moves create noise that can obscure the underlying inflation trend. By stripping them out, core inflation gives policymakers a cleaner signal about demand-driven price pressures that monetary policy can actually influence.

Within core inflation, the Fed and analysts track sub-components closely. Core goods inflation (durable and nondurable goods excluding food and energy) was the main driver of the 2021-2022 inflation surge, as supply chain disruptions pushed up prices for used cars, furniture, and appliances. Core services inflation, which is more persistent and tied to labor costs, became the dominant concern as goods inflation faded in 2023.

An even narrower measure called "supercore" inflation (core services excluding housing) has gained prominence because it isolates the most labor-intensive services where wage growth directly affects prices. The Fed has explicitly called attention to this measure, noting that without progress on supercore, overall inflation is unlikely to return sustainably to the 2% target.

For investors and policymakers, the distinction between headline and core inflation matters enormously for setting expectations about Fed policy. A surge in headline CPI driven by oil prices may not prompt rate hikes if core remains well-behaved. Conversely, sticky core inflation can keep the Fed hawkish even when headline numbers moderate. Understanding which inflation measures the Fed weights most heavily is essential for anticipating policy shifts.