Why is the core inflation rate calculated separately from the overall inflation rate when using the Consumer Price Index (CPI)?

• A. To measure inflation for luxury goods rather than necessities.
• B. To include the effects of seasonal price changes in the inflation calculation.
• C. To exclude volatile food and energy prices, providing a clearer measure of underlying inflation trends.
• D. To focus only on imported goods and their impact on domestic prices.

Answer: (C)

Verified step by step guidance

1. Step 1: Understand that the Consumer Price Index (CPI) measures the average change over time in the prices paid by consumers for a market basket of goods and services.
2. Step 2: Recognize that some components of the CPI, specifically food and energy prices, tend to be highly volatile due to factors like weather, geopolitical events, and supply disruptions.
3. Step 3: Learn that the core inflation rate is calculated by excluding these volatile food and energy prices from the CPI to avoid short-term fluctuations that can obscure the underlying inflation trend.
4. Step 4: Realize that by focusing on core inflation, economists and policymakers get a clearer and more stable measure of long-term inflationary pressures in the economy.
5. Step 5: Conclude that the core inflation rate is not about measuring luxury goods, seasonal changes, or imported goods specifically, but about providing a more reliable indicator of persistent inflation trends by excluding volatile components.