Headline versus core inflation: which really matters?
There are two key measures of inflation: headline inflation and core inflation. This year, headline inflation has dominated the headlines, but which is the most important for investors?
Headline inflation. Headline inflation is a kind of “raw” inflation figure reported through the Consumer Price Index (CPI) as measured by Statistics Canada. The index measures the cost to purchase a fixed basket of goods. The basket contains quantities of specific goods and services, weighted according to how much consumers buy on average. Headline inflation is a way of determining how much inflation is occurring in the broad economy, and as it’s related to changes in the cost of living, it provides information of most interest to consumers.
The CPI is also the measure of inflation that the Bank of Canada uses in its inflation targeting, with a goal of keeping inflation at or near 2%.
Core inflation. Core inflation removes the index components that can exhibit large amounts of volatility from month to month, such as the price of food and energy, which may distort the headline figure. These distortions may not be indicative of the underlying or ongoing inflation pressures in an economy. For instance, a crop failure or poor weather may cause shortages and a short-term spike in food prices. Without these distortions, core inflation provides a better indicator of the direction of inflation in an economy and serves as an important measure for investment managers and investors to understand how inflation may affect markets going forward.