What is underlying inflation?

Underlying inflation refers to a measure of inflation that aims to provide a clearer picture of the long-term trend in price increases by excluding temporary or volatile price changes. This typically involves removing items from the overall inflation calculation that can experience significant fluctuations, such as food and energy prices, which can be affected by short-term supply disruptions or seasonal variations.

By focusing on a more stable set of prices, underlying inflation allows economists and policymakers to assess the underlying inflationary pressures in the economy better. This measure is crucial for central banks when setting monetary policy, as it helps them understand whether inflation is likely to persist or if any observed increases are merely temporary.

This understanding contrasts with other options, which either include volatile price changes, represent interest rate calculations, or reflect consumer expectations rather than providing a direct measure of inflation free from short-term fluctuations. Such distinctions help clarify the importance of focusing on underlying inflation in economic analysis and policy formulation.