When Federal Reserve officials discuss inflation, they often focus on core inflation rather than overall inflation. Core inflation excludes food and energy prices because those categories can swing dramatically due to events such as geopolitical conflicts, weather or supply disruptions. By filtering out those short-term spikes, policymakers get a clearer picture of whether inflation is spreading across the broader economy.
In a speech this week, Federal Reserve Governor Christopher Waller said rising core inflation—not just higher gasoline prices—is what concerns him most. If core inflation remains elevated for several months, the Federal Reserve could consider raising interest rates to slow spending and bring inflation closer to its long-term 2% target. Because Fed policy influences borrowing costs throughout the economy, changes in core inflation can ultimately affect everything from mortgage rates and car loans to credit cards and savings yields.
Understanding core inflation is crucial for consumers and investors alike. For instance, persistent increases in core inflation can signal that the Fed may hike rates, making borrowing more expensive. This can cool the housing market, reduce auto sales, and increase the cost of carrying credit card debt. On the flip side, savers may benefit from higher yields on savings accounts and certificates of deposit.
It's important to note that core inflation excludes direct changes in food and energy prices, but that does not mean those costs disappear from the measure. Higher oil, shipping and production costs can eventually filter into the prices of other goods and services included in core inflation. Therefore, while food and energy are excluded, their indirect effects are still captured.
The Federal Reserve's focus on core inflation underscores its commitment to maintaining price stability, which is essential for sustainable economic growth. By monitoring core inflation, the Fed aims to make informed decisions that balance the dual mandate of maximum employment and stable prices. As such, movements in core inflation are closely watched by market participants for clues about the future path of monetary policy.
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