Why does the Fed believe that the core inflation rate is a “better predictor of future inflation” than the headline inflation rate?
Compared to the headline inflation rate, the core inflation rate _____________.
Wrong! - How is the core inflation rate calculated? Why would this calculation give a better picture of the underlying inflation rate than the headline inflation rate?
Well Done! - Food and fuel prices, which tend to be volatile are excluded from the measure of the core inflation rate. With this volatility removed, the Fed believes that using the core inflation rate is a better method of determining the underlying inflation rate.
