Why do central banks like the Bangko Sentral ng Pilipinas (BSP) monitor core inflation more closely than headline inflation when setting monetary policy?
Answer (1)
Central banks like the Bangko Sentral ng Pilipinas (BSP) monitor core inflation more closely than headline inflation because core inflation provides a more stable and clearer picture of long-term price trends. Headline inflation includes all goods and services, even prices of highly volatile items like food and fuel, which can change suddenly due to events like typhoons, oil price hikes, or international conflict. These sudden changes don’t always reflect the overall health of the economy.Core inflation removes these volatile items and focuses on the underlying price movement of more stable goods and services like rent, healthcare, and education. This helps the BSP decide whether inflation is a temporary issue or part of a longer-term trend. For example, if inflation rises only because of a temporary increase in onion or rice prices due to floods in the Philippines, it wouldn’t make sense for the BSP to raise interest rates immediately. Doing so could hurt the economy by making loans more expensive for businesses and families.In contrast, if core inflation shows that prices of many goods and services are rising consistently over time, it means that the economy might be overheating—spending is too high, and it’s pushing prices up. That’s when the BSP might decide to raise interest rates to slow down spending and control inflation.In summary, core inflation is more useful for decision-making because it gives a better idea of long-term economic pressure. It helps the BSP avoid reacting to temporary price spikes, and instead focus on actions that will support stable prices and economic growth over time.
