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What Is Headline Inflation?
Headline inflation is the raw inflation figure reported in relation to the Consumer Price Index (CPI), which is released monthly by the Bureau of Labor Statistics (BLS).
The CPI reflects the cost of purchasing a fixed basket of goods. It is used to determine how much inflation is occurring in the broader economy. The CPI indexes the current year's prices relative to a base year's values.
Key Takeaways
- Headline inflation is the raw inflation figure reported in relation to the Consumer Price Index (CPI).
- The CPI determines inflation by calculating the prices on a fixed basket of goods.
- Core inflation removes the CPI components that can exhibit large amounts of volatility from month to month.
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Investopedia / Yurle Villegas
Understanding Headline Inflation
Headline inflation is a measure of total inflation. It is not adjusted to remove highly volatile figures, including those that can shift regardless of economic conditions.
Headline inflation is often closely related to shifts in the cost of living, which provides useful information to consumers within the marketplace.
The headline figure is also not adjusted for seasonality or for elements of food and energy prices, which are removed when calculating core CPI. Headline inflation is usually quoted on an annualized basis, meaning that a monthly headline figure of 4% inflation equates to a monthly rate that, if repeated for 12 months, would create 4% inflation for the year. Comparisons of headline inflation are typically made on a year-over-year basis, also known as top-line inflation.
Negatives of Rising Inflation
Inflation is a threat to long-term investors because it erodes the value of future dollars, can stifle economic growth, and can cause a rise in prevailing interest rates. While headline inflation tends to get the most attention in the media, core inflation is often considered the more valuable metric to follow. Both headline and core results are followed closely by investors, and they are also used by economists and central banking figures to set economic growth forecasts and monetary policy.
Core Inflation
Core inflation is a version of CPI that removes components that can exhibit large amounts of volatility from month to month, causing unwanted distortion to the headline figure. The most commonly removed factors are those relating to the costs of food and energy. Food prices can be affected by factors outside of those attributed to the economy, such as environmental shifts that cause issues in the growth of crops. Energy costs, such as oil production, can be affected by forces outside of traditional supply and demand, such as political dissent.
What Is a Central Bank?
A central bank is a financial institution given privileged control over the production and distribution of money and credit for a nation or a group of nations. In modern economies, the central bank is usually responsible for the formulation of monetary policy and the regulation of member banks.
Central banks are inherently non-market-based or even anti-competitive institutions. Although some are nationalized, many central banks are not government agencies, and so are often touted as being politically independent.
However, even if a central bank is not legally owned by the government, its privileges are established and protected by law. The critical feature of a central bank—distinguishing it from other banks—is its legal monopoly status, which gives it the privilege to issue banknotes and cash. Private commercial banks are only permitted to issue demand liabilities, such as checking deposits.
What Is the Cost of Living?
The cost of living is the amount of money needed to cover basic expenses such as housing, food, taxes, and healthcare in a certain place and time period. The cost of living is often used to compare how expensive it is to live in one city versus another, and it is tied to wages. If expenses are higher in a city, such as New York, for example, salary levels must be higher so that people can afford to live in that city.
What Is the Bureau of Labor Statistics (BLS)?
The Bureau of Labor Statistics (BLS) is a federal agency that collects and disseminates various data about the U.S. economy and labor market. Its reports include the Consumer Price Index (CPI) and the Producer Price Index (PPI), both of which are considered to be important measures of inflation.
The Bottom Line
Headline inflation is a raw figure that reflects changes in the consumer price index (CPI) throughout the entire economy. It differs from core inflation, which is CPI adjusted to exclude food and energy prices, which are volatile. Headline inflation is a useful measure of how the cost of living might fluctuate on a monthly or yearly basis.
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