Explain why core inflation is lower than the cpi?

Question: Explain why core inflation is lower than the cpi?

Core inflation is a measure of the change in the prices of goods and services, excluding food and energy sectors. Food and energy prices are not included in this measure because they tend to be more volatile and affected by external factors, such as weather, supply and demand, and speculation. Core inflation is considered a better indicator of the underlying trend of inflation in the economy.

The consumer price index (CPI) is another measure of the cost of living for consumers. It includes all goods and services, including food and energy. However, CPI can be influenced by temporary shocks or fluctuations in food and energy prices, which may not reflect the true inflationary pressures in the economy.

Therefore, core inflation is usually lower than CPI, because it excludes the more volatile components of CPI. For example, in 2008, CPI inflation reached 5% due to a spike in oil prices, while core inflation remained around 2%. Core inflation is more stable and predictable than CPI, and it is used by policymakers and analysts to assess the long-term inflation outlook.