September core inflation in the Eurozone: down to 1,8% (graph).

from Merijn Knibbe

The European Central Bank (ECB) targets consumer price inflation (CPI). CPI includes energy prices. These are quite volatile. In the long run CPI including energy (often called headline inflation) shows a larger increase than CPI excluding energy prices (often called core inflation) which means that when one wants to calculate the purchasing power of wages or the rise of the consumer price level in the long run, headline inflation is the preferred metric. But in the short run headline inflation is, because of these volatile energy prices, (much) less stable than the Core inflation (especially in troubled times, like the 2008-2012 period). Which means that for short and even medium term analysis of the purchasing power of wages or the development of the consumer price level, core inflation is the preferred metric.

Every month, Eurostat calculates a ‘flash’ estimate of inflation in that particular month which is published a few days before the monthly meeting of the governing council of the ECB, to enable the bankers to base their monetary decisions on up to date information. Up till now, this flash estimate only estimated headline information. Starting this month, it also contains information which enables one to calculate core inflation. Good news!And the September data show why it’s important to calculate core inflation: headline inflation is up – but core inflation is down (a little). It’s even below the ECB inflation target. No reason to panic – at the ECB (click on the graph to see a slightly better image).

In fact, the ECB should not target a limited inflation metric like the consumer price index but a broader index or more indexes, like a combination of the GDP deflator and house prices and not on the Eurozone scale but on the national scale. But that’s another story. At this moment, they still target headline inflation, for better or worse. And when you target headline inflation in the medium run – you should look at core inflation in the short run. Fortunately, Eurostat enabled this.

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