What is Headline Inflation?
Headline inflation is the raw inflation figure reported through the Consumer Price Index (CPI), which is released monthly by the Bureau of Labor Statistics (BLS). The CPI calculates the cost required to purchase a fixed basket of goods to determine the level of inflation in the broad economy. The CPI uses a base year and indexes the current year’s prices to those values from the base year.
Key Takeaways
- Headline inflation is the unadjusted inflation figure reported through the CPI.
- The CPI calculates inflation by assessing the cost of a fixed basket of goods.
- Core inflation excludes components of the CPI that can exhibit large volatility from month to month.
Headline Inflation Explained
As it includes all aspects within an economy that experience inflation, headline inflation is not adjusted to remove highly volatile figures, including those that can shift regardless of economic conditions. Headline inflation often closely relates to shifts in the cost of living, providing essential information to consumers in the marketplace.
The headline figure is not adjusted for seasonality or the often-volatile elements of food and energy prices, which are excluded in the core CPI. Headline inflation is typically quoted on an annualized basis, meaning that a monthly headline figure of 4% inflation equates to a monthly rate that, if repeated for 12 months, would produce 4% inflation for the year. Comparisons of headline inflation are commonly made on a year-over-year basis, also known as top-line inflation.
The Downsides of Rising Inflation
Inflation threatens long-term investors by diminishing the value of future dollars, potentially stifling economic growth, and causing a rise in prevailing interest rates. While headline inflation often receives the most media attention, core inflation is frequently considered a more valuable metric to follow. Both headline and core results are monitored by investors and are also utilized by economists and central banking officials to establish economic growth forecasts and monetary policies.
Core Inflation
Core inflation removes CPI components that can exhibit large month-to-month volatility, thereby avoiding unwanted distortions to the headline figure. The most commonly excluded factors are related to the costs of food and energy. Food prices can be influenced by factors external to the economy, such as environmental changes affecting crop yields. Energy costs, such as oil production, can be influenced by factors beyond traditional supply and demand, such as political unrest.
From 1957 to 2018, the average core inflation rate in the United States was reported as 3.64%. The all-time high was 13.60% in June 1980, while the lowest rate was 0% in May 1957. As of 2018, the Federal Reserve’s target for core inflation is 2%.
What is a Central Bank?
A central bank is a financial institution given privileged control over the production and distribution of money and credit for a nation or group of nations. In modern economies, the central bank is usually responsible for formulating monetary policy and regulating member banks. Although some are nationalized, many central banks are not government agencies and are often touted as politically independent. However, even if not legally owned by the government, central banks have privileges established and protected by law. The central bank’s defining feature is its legal monopoly status, giving it the privilege to issue banknotes and cash. Private commercial banks are only permitted to issue demand liabilities, such as checking deposits.
What is the Cost of Living?
The cost of living is the amount of money needed to cover basic expenses such as housing, food, taxes, and healthcare in a certain place and period. The cost of living is often used to compare how expensive it is to live in one city versus another and is linked to wages. If expenses are higher in a city, such as New York, salaries must also be higher to ensure that residents can afford to live there.
What is the Bureau of Labor Statistics (BLS)?
The Bureau of Labor Statistics (BLS) is a federal agency that collects and disseminates various data on the U.S. economy and labor market. Its reports include the Consumer Price Index (CPI) and the Producer Price Index (PPI), both of which are crucial measures of inflation.
Related Terms: Consumer Price Index, Core Inflation, Cost of Living, Monetary Policy, Central Bank.
References
- Federal Reserve. “Monetary Policy Report – February 2018”.
