Why is core inflation a preferred inflation indicator for most economists?
Measures of core inflation attempt to strip out or smooth volatile changes in particular prices to distinguish the inflation signal from the transitory noise. Thus, relative to changes in headline inflation measures, changes in core measures are much less likely to be reversed, provide a clearer picture of the underlying inflation pressures, and so serve as a better guide to where headline inflation itself is heading. Of course, if a particular shock to noncore prices is not temporary but more persistent, then the higher costs are likely to put some upward pressure on core prices. Central bankers must always be aware of this risk. However, research has shown that, over the past 25 years or more, headline inflation in the United States has tended to revert more strongly toward core inflation than core inflation has moved toward headline inflation. As that record suggests, core measures often are much better than headline indexes at providing a first approximation of the permanent change
