Why does the Federal Reserve and other central banks often focus on core inflation rather than headline inflation?
A. Because core inflation includes more luxury goods
B. Because core inflation is easier to manipulate
C. Because core inflation removes volatile items like food and energy
D. Because core inflation only measures international prices
Answer (1)
The correct answer is letter C. Because core inflation removes volatile items like food and energyCore inflation is a measure of the price level that excludes food and energy prices, which are often very volatile due to weather conditions or global market changes. By removing these, central banks like the Federal Reserve or Bangko Sentral ng Pilipinas can focus on the long-term trend of inflation without reacting to short-term price spikes.For instance, in the Philippines, a sudden increase in onion or garlic prices caused a temporary jump in headline inflation in recent years. But the core inflation stayed relatively stable, showing that most other goods and services were not affected. This helps policymakers avoid overreacting with interest rate changes based on temporary events.
