What Is Core CPI? | Financial Glossary

Key Takeaways:
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Core CPI (Consumer Price Index) is a variation of the regular (headline) CPI that measures changes in the cost of goods and services excluding volatile components like food and energy, offering a clearer view of long-term inflation trends.
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It helps central banks and policymakers assess underlying inflation pressures without short-term price shocks.
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Core CPI is a key indicator used to guide interest rate decisions and shape monetary policy in major economies such as the UK.

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Read more about key consumer price data here:‍

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Core CPI explained

Core CPI (Consumer Price Index) is a measure of the average change over time in the prices paid by consumers for goods and services, excluding certain items that can be volatile. Specifically, it omits food and energy prices, which are known for their fluctuations. This makes core CPI a more stable indicator of long-term inflation trends.

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Why exclude food and energy?

The rationale behind excluding food and energy prices lies in their unpredictability. Prices for these items can vary significantly due to seasonal changes, geopolitical tensions, or natural disasters. By focusing on a more stable set of goods and services, core CPI provides a clearer picture of underlying inflation trends.

For instance, during a drought, the price of agricultural products may skyrocket, skewing the overall inflation rate if included. Similarly, geopolitical instability can lead to sudden spikes in oil prices, which would not accurately reflect the broader economic conditions.

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Components of core CPI

Core CPI includes a wide range of categories that reflect consumer spending. These categories typically encompass housing, clothing, healthcare, and transportation. Each of these components is weighted according to its importance in the average consumer's budget, ensuring that the index accurately represents consumer behaviour.

Housing, for example, often constitutes the largest portion of consumer expenditures, reflecting the significant role that rent or mortgage payments play in monthly budgets. In contrast, categories like clothing may have a smaller weight, yet they still contribute to the overall understanding of consumer price movements.

Additionally, the methodology used to calculate core CPI is continuously refined to adapt to changing consumer habits and economic conditions. For instance, the introduction of new goods and services, such as digital subscriptions or advancements in healthcare technology, necessitates regular updates to the index. This ensures that core CPI remains relevant and accurately captures the evolving landscape of consumer spending. Economists and policymakers closely monitor these changes, as they can provide insights into economic health and inform decisions related to monetary policy and inflation targeting.

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How is core CPI calculated?

The calculation of core CPI involves a systematic approach. First, data is collected from various sources, including surveys of prices for thousands of items across different sectors. This data is then adjusted for seasonal variations to ensure accuracy.

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The role of the Bureau of Statistics

In the UK, the Office for National Statistics (ONS) plays a vital role in calculating core CPI. The ONS uses a basket of goods that reflects current consumer spending patterns, updating it regularly to account for changes in preferences and consumption habits. This ensures that the core CPI remains relevant and accurate.

In the US, the Bureau of Labor Statistics (BLS) is responsible for calculating core CPI. Like the ONS, the BLS maintains a representative basket of goods and services, updating it periodically to reflect shifts in consumer behaviour and ensure the index accurately measures underlying inflation trends.

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Understanding the index value

The core CPI is expressed as an index number, with a base year typically set to 100. If the core CPI rises to 105, it indicates a 5% increase in prices compared to the base year (the base year for the UK CPI is currently 2015, which means the index is set to 100 in that year).

This index value helps economists and analysts understand inflation trends over time.

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The importance of core CPI

Core CPI serves multiple purposes in the realm of economics and finance. It is a key indicator for policymakers, businesses, and investors, providing insights into inflationary pressures and economic health.

Guiding monetary policy

Central banks, such as the Bank of England (BoE), closely monitor core CPI to inform their monetary policy decisions. A rising core CPI may prompt the bank to consider increasing interest rates to curb inflation, while a stagnant or declining core CPI might lead to lower interest rates to stimulate economic growth.

However, in the US (unlike the BoE, whose preferred measure of inflation is CPI), the Federal Reserve’s (Fed) preferred measure is the Personal Consumption Expenditures Price Index (PCE), specifically the core PCE. Therefore, the Fed primarily focuses on core PCE to inform its monetary policy decisions.

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Read more about the Bank of England and Federal Reserve's interest rate decisions here:

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Impact on business decisions

For businesses, understanding core CPI can help in strategic planning. Companies may adjust their pricing strategies, wage negotiations, and investment decisions based on anticipated changes in inflation. For instance, if core CPI is on the rise, businesses might pre-emptively increase prices to maintain profit margins.

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Core CPI vs. headline CPI

It is essential to differentiate between core CPI and headline CPI. While core CPI excludes food and energy prices, headline CPI often includes all items. This distinction is crucial for understanding the broader economic landscape.

In the UK, headline CPI is often referred to as headline inflation, as it is also the Bank of England’s preferred measure for setting its inflation target.

Volatility in headline CPI

Headline CPI can be significantly affected by short-term fluctuations in food and energy prices.

For example, a spike in oil prices due to geopolitical events can lead to a sharp increase in Headline CPI, even if the underlying inflation rate remains stable. Therefore, core CPI is often viewed as a more reliable indicator of long-term inflation trends.

When to use each measure

Analysts and economists often use both core and headline CPI to gain a comprehensive understanding of inflation. Core CPI is particularly useful for assessing underlying trends, while headline CPI provides a snapshot of the overall cost of living.

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Global implications of core CPI

The implications of core CPI extend beyond national borders. As a key indicator of inflation, it influences global financial markets and economic policies. Changes in core CPI can affect currency values, investment flows, and international trade.

Currency valuation

When core CPI rises in a country, it may lead to expectations of higher interest rates, which can strengthen the national currency. Conversely, a declining core CPI might weaken the currency as investors seek better returns elsewhere. This dynamic highlights the interconnectedness of global economies.

Investment strategies

Investors often adjust their portfolios based on core CPI trends. For instance, rising inflation may lead to increased interest in commodities or inflation-protected securities, while lower inflation could prompt a shift towards equities or bonds. Understanding core CPI can help investors navigate these shifts effectively.

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Conclusion

Core CPI is a vital economic indicator that helps stakeholders understand inflation trends and make informed decisions. By excluding volatile food and energy prices, it provides a clearer picture of the underlying economic landscape. As businesses and investors navigate an ever-changing global economy, keeping an eye on Core CPI can offer valuable insights into future market conditions.

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Frequently asked questions (FAQs)

What does core CPI mean?

Core CPI stands for core Consumer Price Index. It is a measure of inflation that tracks the prices of goods and services excluding food and energy prices, which tend to be more volatile due to seasonal and external factors (like oil prices or weather events).

By removing these volatile items, core CPI gives a more stable and accurate view of underlying, long-term inflation trends. It’s widely used by central banks (like the Bank of England) to help guide decisions on interest rates and monetary policy.

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What is the core CPI rate in the UK?

The UK’s core CPI rate (excluding volatile items such as food and energy) stood at 3.5% year-on-year in May 2025, down from 3.8% in April, signalling a slight easing in underlying inflation.

Read more about the latest CPI data in the UK here - When is the next UK CPI data released?

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What is the core CPI in trading?

In trading, core CPI is a key economic indicator that helps assess underlying inflation by excluding volatile items like food and energy. Traders closely watch core CPI data because it influences expectations around interest rate decisions by central banks.

A higher-than-expected reading can signal rising inflation pressures, potentially leading to rate hikes, currency strength, and shifts in bond and stock markets. Because it reflects more stable inflation trends, core CPI is seen as a more reliable guide for forecasting monetary policy and informing market strategies.

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What is the current CPI today?

According to the latest data from the Office for National Statistics (ONS), the UK’s headline CPI rate was 3.4% in the 12 months to May 2025, down slightly from 3.5% in April.