What Is the Difference Between Core and Headline Inflation?

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According to James Bullard for the Federal Reserve Bank of Saint Louis, Mo., headline inflation includes food and energy prices when calculating the cost of living for the average consumer. Core inflation does not incorporate these two factors, because they are considered quite volatile. Members of the Federal Reserve and most economists prefer to rely on core inflation numbers to give a truer picture of future inflation trends without complications.

Bullard explains that there is an enduring controversy over which inflation metric is the best to use when deciding on monetary policies intended to manage inflation. The goal is to accomplish a low and steady inflation rate that is safest for the nation's economy and its investors. Some economists argue that headline inflation is best, stating that it is unwise to remove food and energy components because they are such a large factor in every citizen's budget. Advocates for the use of the core inflation metric argue that food and energy prices can fluctuate suddenly and drastically in reaction to unexpected events, such as natural disasters, war and other disruptions to the national supply. Therefore, core inflation is believed to provide a cleaner and more stable insight into the underlying behavior of inflation.