Question

What do we mean by the Core rate of inflation? Why do we look at it? How can it help us understand inflation?

Answer 1

The core rate of inflation is the change in the price level of goods and services excluding food and energy. The prices of food and energy are subject to more rapid and wide fluctuations. Therefore, they are not considered in the core inflation.

We look at the core inflation to know the real long-term price trends without by ignoring the short-term price fluctuations. Since core inflation does not consider goods like food and energy which are subject to short-term volatility, core inflation indicates the long-term price trend. Core inflation helps us understand how the price level changes in the long-run without getting affected by short-term volatility.