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CPI VS Core CPI: What to Look for in the Calendar?

Adam Lienhard

CPI and Core CPI are general trading terms that have a very significant impact on the markets. The publications of CPI data impact the prices every month. Learn more about CPI and Core CPI to use them in your trading on Headway.

What is CPI?

Consumer Price Index (CPI) is a widely used economic indicator that measures changes in the average prices of a basket of goods and services commonly purchased by households. CPI helps to predict inflation and price stability in an economy over time. 

The CPI basket includes a variety of items such as food, housing, clothing, transportation, healthcare, education, and recreation. 

To reflect the consumption patterns of households, different items in the basket are assigned different weights based on their relative importance. Items that are more frequently purchased carry greater weight in the index calculation. The weights are periodically updated to reflect changes in consumer spending patterns.

CPI is typically measured relative to a base period, which is assigned a value of 100. Changes in the index value over time indicate the percentage change in prices compared to the base period. For example, if the CPI has increased to 120, it suggests a 20% rise in prices since the base period.

CPI is primarily used as a measure of inflation. It helps policymakers, economists, and investors understand and monitor changes in the cost of living for consumers. A rising CPI indicates inflation, while a falling CPI suggests deflation or disinflation (deceleration in the rate of price increases).

In addition to the overall CPI, sub-indices may be calculated to measure price changes within specific categories such as food, energy, core goods, and services. These sub-indices provide insights into the price movements within particular sectors of the economy.

CPI data is influential in determining various economic policies, including monetary policy decisions by central banks. It also affects the cost-of-living adjustments in salaries, pensions, and social security benefits, as well as contract negotiations and investment strategies.

What is the core CPI?

Core CPI, or Core Consumer Price Index, is a measure of inflation that excludes certain volatile components from the overall Consumer Price Index (CPI). The goal of this index is to provide a more accurate reflection of underlying inflation trends by excluding items whose prices can be highly volatile and subject to temporary fluctuations.

Core CPI removes specific components from the overall CPI basket that tend to experience significant price fluctuations, such as food and energy prices. However, the exact composition may differ, and some variations may exclude additional items like tobacco or other specific goods. These items are excluded because they can be influenced by temporary factors like seasonal changes, supply disruptions, or fluctuations in commodity prices.

By excluding volatile components, Core CPI aims to capture the persistent or underlying inflationary pressures in an economy. It provides a clearer picture of long-term inflation trends, allowing policymakers and economists to assess the general price level changes without the noise from volatile items.

Central banks and policymakers use Core CPI to monitor inflation trends and make informed decisions regarding monetary policy. By focusing on core inflation, policymakers can assess whether changes in the general price level are temporary or indicative of broader inflationary pressures, helping guide interest rate decisions and other policy measures.

Core CPI is often compared to the overall CPI to gain insights into the impact of volatile components on inflation. The difference between Core CPI and the overall CPI can highlight the influence of volatile items on price changes and provide a clearer understanding of the underlying inflationary pressures.

CPI VS core CPI: What is the difference?

CPI (Consumer Price Index) and Core CPI (Core Consumer Price Index) have different components included in each index. Here’s a breakdown of their distinctions:

Overall CPICore CPI
CalculationAn average measure of price changes of a basket of goods and services consumed by households.Derived from the CPI calculation but excludes certain volatile components.
Volatile itemsIncludes all components, including volatile items like food and energy prices.Removes specific components (food and energy prices) subject to significant short-term price swings. These volatile items are excluded to focus on the underlying inflation trends and reduce the impact of temporary price fluctuations.
The importance for your analysisProvides a comprehensive view of overall price movements, reflecting changes in the cost of living for consumers. It is widely used to monitor inflation rates and assess the purchasing power of consumers over time.Aims to provide a more stable measure of inflation by capturing the persistent, or core, inflationary pressures in the economy. It helps policymakers and economists gauge the long-term trend in prices.

In summary, CPI includes all components of the consumer basket, including volatile items like food and energy. And Core CPI excludes these volatile components to focus on the underlying inflation trends. Both indices serve important roles in monitoring inflation, but Core CPI provides a more stable measure of inflation by excluding short-term price fluctuations.

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