Why do central banks like the BSP focus more on core inflation rather than headline inflation when setting policy?
A. Headline inflation includes interest rate changes
B. Core inflation is easier to measure
C. Core inflation reflects longer-term trends by excluding volatile items
D. Headline inflation does not include imported goods
Answer (2)
The correct answer is letter C. Core inflation reflects longer-term trends by excluding volatile itemsCore inflation is preferred by central banks like the Bangko Sentral ng Pilipinas (BSP) because it removes highly volatile items like food and energy. Prices for vegetables or gasoline can change quickly due to typhoons or global conflicts. These changes are short-term and not caused by local economic policy.By looking at core inflation, the BSP gets a clearer picture of the real trend in consumer prices. This helps them decide whether to raise interest rates or adjust monetary policy without overreacting to temporary changes.For instance, if a typhoon floods farms in Nueva Ecija and causes onion prices to spike, headline inflation will increase. But since this is temporary, the BSP might ignore it and not change rates. Core inflation lets them focus on sustained price changes, not seasonal or crisis-based ones.
The correct answer is C. Core inflation reflects longer-term trends by excluding volatile items.Central banks like the BSP focus on core inflation because it excludes volatile components such as food and energy prices, which can fluctuate widely due to temporary factors like weather or supply shocks. By excluding these, core inflation provides a clearer picture of the underlying, persistent inflation trend that monetary policy aims to control. Headline inflation, on the other hand, can be noisy and influenced by short-term price shocks, making it less reliable for setting policy.
