Headline Inflation

Contains all components of an economy that experience inflation. 

Author: Manu Lakshmanan
Manu Lakshmanan
Manu Lakshmanan
Management Consulting | Strategy & Operations

Prior to accepting a position as the Director of Operations Strategy at DJO Global, Manu was a management consultant with McKinsey & Company in Houston. He served clients, including presenting directly to C-level executives, in digital, strategy, M&A, and operations projects.

Manu holds a PHD in Biomedical Engineering from Duke University and a BA in Physics from Cornell University.

Reviewed By: Osman Ahmed
Osman Ahmed
Osman Ahmed
Investment Banking | Private Equity

Osman started his career as an investment banking analyst at Thomas Weisel Partners where he spent just over two years before moving into a growth equity investing role at Scale Venture Partners, focused on technology. He's currently a VP at KCK Group, the private equity arm of a middle eastern family office. Osman has a generalist industry focus on lower middle market growth equity and buyout transactions.

Osman holds a Bachelor of Science in Computer Science from the University of Southern California and a Master of Business Administration with concentrations in Finance, Entrepreneurship, and Economics from the University of Chicago Booth School of Business.

Last Updated:September 15, 2022

Headline inflation is not modified to exclude highly volatile data, particularly those that can change regardless of economic conditions, because it contains all components of an economy that experience inflation. 

Headline Inflation

The Consumer Price Index (CPI), produced monthly by the Bureau of Labor Statistics (BLS), measures headline inflation. To quantify how much inflation occurs across the economy, the CPI determines the price to buy a fixed basket of items. The CPI employs a base year and indexes the current year's prices using the base year's values.

Changes in the cost of living are frequently strongly correlated with headline inflation, which gives customers in the market vital information. The cost of living is the sum of money required in a certain location and time frame to meet necessities, including housing, food, taxes, and medical care. 

The cost of living, which is correlated with salaries, is frequently used to compare how expensive it is to live in one city instead of another. If expenses are higher in a metropolis, such as New York, pay levels must be higher so people can afford to live there.

Because a wage can provide a greater standard of living in a place where daily expenses such as rent, food, and entertainment are less, the cost of living can be a key element in the growth of personal wealth. A large wage, on the other hand, might not appear adequate in a pricey city.

The headline statistic is not seasonally-adjusted, and the core CPI does not include the frequently volatile components of food and energy costs. 


Typically, headline inflation is expressed on an annualized basis. Thus a headline statistic of 5% inflation for a given month represents a monthly rate that, if sustained for a whole year, would result in 5% inflation. Top-line inflation, sometimes referred to as headline inflation, is typically compared year-over-year.

The maintenance of the economy's price level is a mandate for many central banks throughout the world. The mandate specifies the price level measurement for formulating monetary policy. The goal variable for the majority of central banks is headline inflation or a comparable index.

The explanation is that headline inflation is a broad metric that accurately reflects the assortment of products and services that most households consume. 

The Bank of England, the European Central Bank (ECB), and the Reserve Bank of India are three significant central banks that employ headline inflation. The Personal Consumption Expenditure Index (PCE Index), which monitors the Consumer Price Index, is another comparable metric used by the Federal Reserve

The CPI is the key headline inflation indicator in the United States. The Bureau of Labor Statistics calculates and releases the number.

Since headline inflation is more volatile, it cannot be utilized to determine inflation trends and is sometimes replaced by core inflation to determine the trend's direction. Some economists contend that monetary policy should be created using core inflation or comparable metrics.

The main defense is that the price volatility of food and energy is temporary.

What is Inflation?

Inflation is called the loss of a currency's relative purchasing power over time. The increase in the average price level of a basket of chosen goods and services over time in an economy can provide a quantitative approximation of the rate at which the reduction in buying power happens. 

A unit of money now functionally buys less than it did in earlier periods due to increased prices, which is frequently stated as a percentage. Deflation is characterized by an increase in the purchasing power of money and a decrease in prices.

Long-term investors are at risk from inflation because it reduces the value of future money, can hinder economic expansion, and can raise market interest rates. 

While headline inflation receives the most media attention, core inflation is frequently seen as the more important statistic to monitor. 

Investors actively monitor headline and core results, and economists and central bank officials use both to determine economic growth projections and monetary policy.


Though it may manifest through other economic mechanisms, a rise in the money supply is the primary cause of inflation. The monetary authorities can boost a nation's money supply by:

  • Printing additional currency and distributing it to people
  • Legally depreciating (decreasing) the value of the money that is legal tender.
  • Acquiring government bonds from banks on the secondary market to create new money as reserve account credits through the banking system (the most common method)

In each of these scenarios, the money ultimately loses its ability to buy things. Three different inflationary mechanisms can be identified: demand-pull, cost-push, and built-in inflation.

Core Inflation

Core inflation eliminates the CPI components from the calculation with a high level of month-to-month fluctuation and may unintentionally skew the headline number. The elements about the cost of food and energy are most frequently eliminated. 

Factors other than those attributable to the economy, such as environmental changes that affect crop growth, can impact food costs. In addition, forces other than the usual supply and demand, including political unrest, can impact energy costs, including oil production.

As a result of their potential for extreme volatility, food and energy costs are excluded from this estimate. Moreover, since food and energy are essentials, their demand remains relatively stable even as costs grow. 


For instance, even if oil costs increase, you will still need to fill up your tank to be able to drive your car. Similarly, you won't put off buying groceries since the cost increases at the shop. In addition, gas and oil are exchanged as commodities on exchanges where dealers can purchase and sell them. 

Energy and food commodities are speculative, which causes price volatility and erratic changes in the inflation rate. For instance, a drought may have a significant impact on crop prices. 

The impacts on inflation may only last a short while, after which they correct themselves, and the market returns to equilibrium. Therefore, the cost of food and energy for these commodities is not included in the computation of core inflation.

Because core inflation represents the link between the cost of goods and services and the level of consumer income, measuring core inflation is essential. Consumers will have reduced purchasing power if prices for products and services rise over time, but consumer income stays the same. 


Compared to the cost of essential goods and services, inflation lowers the value of money or income. However, consumers will have more purchasing power if income increases—also known as wage growth—while the prices of products and services stay the same.

Asset inflation also happens as investment portfolios, and housing prices increase, providing consumers with more money to spend.

What is a central bank?

A financial institution with exclusive authority over creating and distributing money and credit for a country or a group of countries is known as the central bank. 

In contemporary economies, the central bank is typically in charge of monetary policy formulation and member bank regulation.

Inherently non-market-based or even anti-competitive institutions are central banks. Although some have been nationalized, many central banks are not part of the government and are therefore frequently hailed as politically independent. 

However, even though a central bank isn't technically the government's property, its rights are still created and safeguarded by the law.

The crucial characteristic that sets a central bank apart from other banks is its legal monopoly position, which grants it the right to print money and banknotes. As a result, only demand liabilities, like "checking deposits," may be issued by private commercial banks.

Although they might have a wide range of responsibilities depending on their nation, central banks' obligations often fall into three categories:

  1. The national money supply is controlled and manipulated by central banks, who also determine interest rates for loans and bonds in addition to printing money. Typically, central banks increase interest rates to restrain inflation and restrict growth while lowering them to promote economic expansion, business investment, and consumer spending. They control monetary policy in this way to direct the nation's economy and attain economic objectives like full employment.
  2. Second, among other measures, they control member banks through capital requirements, reserve requirements (which establish the maximum amount of money banks can lend to consumers and the minimum amount of cash they must maintain on hand), and deposit guarantees. In addition, they maintain foreign exchange reserves and lend money to a country's banks and government.
  3. Lastly, a central bank serves as an emergency lender to struggling commercial banks, other organizations, and occasionally even a government.  


When a government needs to raise more money, the central bank can offer a politically appealing alternative to taxation by buying government debt obligations.

What is the Bureau of Labor Statistics (BLS)?

A federal organization called the Bureau of Labor Statistics (BLS) gathers and makes various data regarding the American economy and labor market. The Producer Price Index (PPI) and the Consumer Price Index (CPI), regarded as crucial inflation indicators, are included in its publications.

The BLS, a division of the U.S. Department of Labor (DOL), is responsible for collecting, compiling, and publishing various statistical data on the labor market, pricing, and productivity. 

The figures this government agency generates are among the most important economic indicators for the American economy, and it takes considerable pains to ensure its reports' accuracy, impartiality, and accessibility.

Bureau Of Labor Statistics

Businesses, academics, and legislators routinely reference BLS data in the media and use it to guide their decisions. Economists and market participants also pay careful attention to it because they use the bureau's reports to make more precise and better predictions about how the economy and markets will function in the future.

The BLS is responsible for releasing some of the most significant statistics reports, including:

Key Takeaways
  • Headline inflation is the unprocessed inflation rate as measured by the CPI.
  • Inflation is called the loss of a currency's relative purchasing power over time.
  • Changes in the cost of living are frequently strongly correlated with headline inflation, which gives customers in the market vital information.
  • The CPI calculates inflation by assessing the costs of a predetermined basket of products.
  • Core inflation is calculated by removing the CPI components that might fluctuate greatly from month to month.
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