Volatility of food and energy prices versus core inflation

With buying groceries and filling up at the pump being regular occurrences, we’re probably most attuned to changes in prices for food and energy than most other items that are measured in the headline Consumer Price Index (CPI) numbers.

Core CPI strips out the price of food and energy and the usual reason for citing the utility in core CPI is that it allows economists to peel back the volatile items to get a second perspective on inflation of prices in general. However, from the chart below, you can see that the volatility of food and energy is on a whole different level since 2000. You can see from 1960 to 2000 that headline and core CPI moved virtually in lock-step. But since 2000, the volatility of food and energy has been increasing, and it looks like that increase is accelerating.

Note that this chart is looking at US figures. However, the story is not much different in Canada.

Source: BLS, FactSet, J.P. Morgan Asset Management. CPI values shown are % change vs. 1 year ago and reflect August 2011 CPI data. CPI component weights are as of December 2011 and 12-month change reflects data through August 2011. Core CPI is defined as CPI excluding food and energy prices.

Chart courtesy of J.P. Morgan Asset Management

Preet Banerjee
Preet Banerjee
...is an independent consultant to the financial services industry and a personal finance commentator. You can learn more about Preet at his personal website and you can click here to follow him on Twitter.
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Showing 3 comments
  • Molichi

    What would be interesting is seeing that is causing the volatility in headline CPI, is it mainly energy or food. My suspicion is that it is mainly energy prices since 2000 which have been extremely volatile, food prices don’t seem that bad at least to me. 

    • Preet

       @Molichi Yes, it’s largely been energy. Food based commodities seem to be in a multi year boom greater than the rate of inflation but energy is the one that has been all over the place.

  • seanhopcraft

    I see food prices having a big impact on Headline CPI in the future. What do you think?