Inflation is an important consideration for non-investors, big businesses, and all those in between. That’s because it reduces the buying power of money by making goods and services more expensive, so you’ll end up spending more just to get the same things as before.
However, you may not know that there are actually 2 types of inflation, namely headline and core. Keep reading to learn more about each type and how what they could mean for your hard-earned money.
Headline inflation: Measuring CPI changes
Headline inflation looks at price changes in the Consumer Price Index (CPI). This is a standard “market basket” of goods and services that a typical family spends on, as determined by the Philippine Statistics Authority or PSA.
In the Philippines, the contents of this market basket are determined by the nationwide Family Income and Expenditure Survey (FIES), which is conducted every 3 years.
The CPI is computed on a national, regional, and provincial level, and there are also CPIs for the National Capital Region or NCR, and selected cities too.
Core inflation: Long-term trend
Core inflation, on the other hand, also refers to changes in the prices of goods and services but doesn’t include certain ones (like rice, meat, fish and root crops) from the food and energy sectors. That’s because these prices can go up and down quite quickly compared to the others.
Without these volatile prices, core inflation may better show the broad trend in price changes. It is often used as an indicator for the direction and speed of inflation in the long term, and also as an indicator for the future rate.
This type of inflation is usually affected the most by the amount of money in the economy that is used for production, and by the country’s monetary policy.
Which is more important?
In essence, headline inflation measures how much the cost of living has gone up or down relative to a certain period. However, core inflation can reveal the true trend for prices without the volatility that could be present in 1 month and absent in another.
In short, headline inflation shows the short-term price movement, while core inflation may hint at how prices will change in the future. This makes them equally important if you’re trying to protect the value of your money through investing.
Remember that if you have an emergency fund (and you should!), you should check if the amount that it holds is still enough or if you need to add more because things are now more expensive.
