Core Inflation: How It Forecasts The Future

A year ago many of our beloved readers were casting flack at Dr. Businomics for his use of “core inflation,” which is inflation excluding food and energy.  Back in 2007 I made the point that core is a better indicator of where future total inflation will be than total inflation is.  This morning’s consumer price index report closes out the story:

Over the last 12 months the CPI has declined by a small amount.  When total inflation was galloping away at a four percent rate, which was only a year ago, who would have thought that the outlook was for lower inflation?

Here’s the takeaway:  If you want to know what happened to the total cost of living in the past, use the total CPI.  If you want an idea of whether we face an inflation problem in the future, look at the core inflation rate.

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