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May 17, 2007

Total and core inflation

Economic news reports sometimes quote two inflation rates -- a core rate and a total rate. N.C. State University economist Mike Walden explains the difference.

"The total rate contains everything. So at the retail level we are looking at what's happening to prices of everything that consumers buy, all products and services," explains Dr. Walden, a North Carolina Cooperative Extension specialist.

"Now the core rate, though, takes everything but subtracts two important prices: those prices for energy products and those prices for food products," he adds.

"Now why? Well, because economists in looking at food and energy prices over the long haul find they are very volatile. They move up one month, move down another month. And if we are trying to look at the inflation rate as some predictor of where prices are going sort of on trend, we may want to take those out," Walden explains. "So that's what the core rate does.

"Now there can be differences: Recently the total inflation rate has been going up at 4 percent, but the core rate's only been going up at about 2.5 percent," he says. "It's thought that the Federal Reserve, which has a lot of influence on our economic lives, actually pays more attention to the core rate than to the total rate."

Posted by deeshore at May 17, 2007 08:31 AM