The Core Inflation Rate and You

The Core Inflation Rate, how it's calculated, and why it's important.

Mar 2, 2014 at 11:55AM

Every month, the Bureau of Labor Statistics, or BLS, reports the consumer price index, or CPI, the most widely used inflation rate. At the same time, the BLS reports the core inflation rate, which excludes food and energy prices. Many investors don't like the core inflation rate because they believe it's unreasonable, given that everyone needs food and energy. However, the Federal Reserve frequently uses core inflation to gauge how the economy is doing, as the volatility of food and energy prices can distort the overall inflation rate. While it may not be the best measure of the inflation rate, the core inflation rate tries to measure the underlying inflation in the economy, making it important for investors to follow.

What is inflation?
Inflation is the rate of increase in the prices of goods and services, or the decline in the "purchasing power" of money. 

As an example, the monthly inflation rate in Argentina is taking off and in January was estimated at 6%. That means you need 6% more money than you did just a month ago to buy the same basket of goods and services.


Core inflation rate
The core inflation -- its full name is the Consumer Price Index for All Urban Consumers Less Food and Energy -- differs from regular inflation in that it excludes food and energy prices. It's derived from the CPI, which tracks a basket of goods and services that is determined by survey results provided by roughly 7,000 families from around the country. The CPI is updated every two years based on the survey results.

The CPI can be volatile, given the frequent price swings in food and energy. The core inflation rate excludes those to give a more stable picture of underlying inflation. It's mainly an indicator for the economy and does not reflect reality; I, for one, don't know anyone who doesn't eat or use energy. However, one good example of its usefulness came in late 2007, when oil prices took off, carrying the inflation rate upward. Meanwhile, the underlying inflation in the economy was little changed.

US Inflation Rate Chart

US Inflation Rate data by YCharts.

When energy and food prices are volatile, the core inflation rate can give policymakers a look at how the rest of the economy is faring. Inflation is dangerous, because it eats away at investors' hard-earned savings; each year, your dollar is worth less as prices rise. Mild inflation is a killer for those living off savings and fixed incomes. The problem is especially acute in bonds, where the 10-year Treasury yields just 2.7%. At the current inflation rate of 1.6%, investors are only earning an inflation-adjusted return of 1.1%.

How to protect yourself
Education is half the battle -- learning about the factors affecting markets and thereby you. The other half of the battle is how you invest both your time and money.

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Dan Dzombak can be found on Twitter @DanDzombak or on his Facebook page, DanDzombak.Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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