What is Core Inflation? What are Core Inflation Indicators?​ ​

What is Core Inflation? What are Core Inflation Indicators?​ ​
What is Core Inflation? What are Core Inflation Indicators?​ ​

The concept of inflation, which can be defined as the price increase experienced in goods and services, expresses the rate of increase not only in a particular good and service but also in the general level of prices in the country. For example, 20% annual consumer price inflation indicates that the general level of consumer prices has increased by 20% compared to the previous year. In other words, it indicates that a basket of goods and services purchased for 100 TL in the previous year increased to 120 TL this year.

High inflation means that purchasing power is decreasing. However, low inflation; It does not mean that prices fall, purchasing power increases and income rises. It means that the prices have increased less than the previous period. Negative inflation (deflation) indicates that prices have decreased compared to the previous period. Inflation has various indicators that include different items. This is where the concept of core inflation emerges.

On the Concept of Core Inflation

The central bank is responsible for maintaining the price stability of the country and implements various monetary policies in order to fulfill its duties. Central banks need to be able to follow price developments closely in order to implement the right monetary policies. In general, central banks base their monetary policies on the Consumer Price Index (CPI). CPI aims to measure the changes in the final price of services or goods sold to the consumer. These goods or services are used in the calculation of the index in proportion to the share of household expenditures. However, the CPI in determining monetary policies; It remains insufficient due to temporary effects such as sectoral shocks, international developments, price movements in agricultural products caused by climate, and public-based price changes.

Core inflation, which excludes temporary price shocks and reflects the main trend of a country's price movements, started to be calculated to compensate for the shortfall of the CPI, which is also accepted as headline inflation. Core inflation rates, first proposed by the German economist Otto Eckstein, are an important guide that can enable central banks to make correct decisions about inflation trends.

What is Core Inflation?

Core inflation, which helps central banks to evaluate the persistent trends in the CPI index used to determine their monetary policies, is the rate of increase in prices for goods and services, where the effect of monetary policy is limited and items such as food and energy, which are defined as out of control, are excluded. In other words, the inflation rate obtained by subtracting items such as food and energy, which are not under the direct control of the central bank, from the headline inflation is called core inflation. Food items used in the headline inflation calculation; Price fluctuations may occur throughout the year due to seasonal differences and weather conditions. In addition, items such as gasoline, natural gas, alcohol and tobacco products can be priced differently by the government, regardless of supply and demand.

What are Core Inflation Indicators?

Core inflation indicators are defined as Special Comprehensive CPI Indicators. The core inflation indicators and their scopes published by the Turkish Statistical Institute in Turkey are as follows:

  • Group A: CPI excluding seasonal products
  • Group B: CPI excluding unprocessed food products, energy, alcoholic beverages and tobacco and gold Group: CPI excluding energy, food and non-alcoholic beverages, alcoholic beverages, tobacco products and gold
  • Group D: CPI excluding unprocessed food, alcoholic beverages and tobacco products
  • E group: CPI excluding alcoholic beverages and tobacco
  • Group F: CPI excluding administered-directed prices

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