Why would you exclude food from the CPI basket when calculating core inflation?

Answer 1

Food is excluded from the Consumer Price Index (CPI) basket when calculating core inflation for a few reasons:

1. Food prices tend to be volatile: Food prices can fluctuate significantly due to factors such as weather conditions, supply and demand dynamics, and seasonal variations. These fluctuations can distort the underlying inflation trend, making it difficult to accurately assess long-term inflationary pressures.

2. Temporary shocks and noise: By excluding food prices, policymakers can focus on the core inflation rate, which filters out temporary shocks and noise that may not reflect the overall inflationary environment. This allows a clearer understanding of the underlying inflationary trend and helps to make more accurate policy decisions.

3. Basic needs and inflation expectations: Food is considered a basic necessity, and changes in its prices can have immediate and significant impacts on individuals' purchasing power and living standards. Including food in core inflation calculations could lead to higher inflation expectations among the public, potentially leading to wage-price spirals and higher inflationary pressures.

4. International standards and consistency: Many countries follow international standards for calculating inflation, such as the guidelines set by the International Monetary Fund (IMF). These standards usually recommend excluding food and energy prices from core inflation calculations to ensure consistency and comparability across countries.

It is important to note that while food prices are excluded from core inflation calculations, they are still monitored separately and included in overall CPI figures, as they are crucial indicators of the cost of living and consumer price trends.