What does the core inflation index exclude?
A Taxes and government spending.
B The cost of goods and services.
C Housing prices.
D Volatile economic variables like food and energy prices.
The correct answer and explanation is:
The correct answer is D: Volatile economic variables like food and energy prices.
Explanation:
Core inflation is a measure of the long-term trend in the price level of goods and services in an economy, excluding certain items that can cause short-term fluctuations. Specifically, core inflation excludes volatile components like food and energy prices. These items tend to experience large and unpredictable price swings due to factors such as weather events, geopolitical instability, or seasonal variations, which can distort the true underlying inflationary trends.
By removing food and energy prices, the core inflation index provides a clearer picture of inflation that reflects more stable and predictable economic pressures. The rationale is that changes in food and energy prices are often temporary and not reflective of the overall economy’s underlying inflationary pressures. For instance, if there is a sudden spike in oil prices due to supply disruptions, this could artificially inflate the overall inflation rate, even though the economy may not be experiencing broad-based inflation.
The core inflation measure, therefore, focuses on the more stable and persistent changes in the prices of goods and services that are less susceptible to such volatility. This makes it a valuable tool for central banks, such as the Federal Reserve in the United States, to monitor and guide monetary policy. By targeting core inflation, policymakers can make decisions that are less influenced by short-term price movements and better aligned with the long-term health of the economy.
In contrast, A (taxes and government spending), B (the cost of goods and services), and C (housing prices) are not excluded from core inflation, although the way they are measured can vary.