Core CPI (ex Food & Energy) — underlying inflation persistence and policy implications
Recent U.S. core inflation data point to a regime of gradual deceleration, with no clear evidence of reacceleration, but also without confirmation of a fast and durable convergence toward levels consistent with price stability. Core CPI continues to rise at a pace broadly aligned with its recent structural trend, while medium-term momentum shows early signs of cooling.
Because it excludes food and energy, core CPI offers a cleaner signal of underlying inflation persistence. At the same time, this makes the series particularly sensitive to dynamics in services and shelter, where price rigidities tend to be stronger and adjustment slower.
Recent data dynamics
Over recent months, core CPI has displayed a pattern of stable but positive monthly increases, with no sustained sequence of upside surprises. Stronger individual readings have generally been followed by normalization, suggesting the absence of a renewed acceleration in underlying inflation.
Supporting indicators reinforce this interpretation. Short-term direction remains positive, reflecting inflation inertia, while measures of acceleration are broadly flat. Trend signals point to slow, incremental cooling rather than a decisive regime shift.
Composition and persistence
By construction, core CPI excludes food and energy, providing a clearer view of inflation persistence driven by services and shelter. These components typically respond with long lags to monetary policy and exhibit greater downward rigidity, which helps explain the slow pace of disinflation observed in recent data.
While core CPI filters out short-term volatility, it does not eliminate macro risks entirely. Persistent strength in services inflation can keep underlying pressure elevated even when headline measures appear benign, delaying full normalization.
Macro context and monetary policy
From a policy perspective, core CPI remains a key diagnostic tool for assessing inflation persistence. While the Federal Reserve formally targets PCE inflation, core CPI is widely monitored as a complementary gauge of underlying price dynamics.
Current core inflation dynamics support a cautious policy stance. Market pricing reflects expectations that easing may eventually occur, but the persistence embedded in services-related components argues for patience and continued data dependence.
Downside scenario — faster disinflation: Sustained lower monthly core readings, combined with clearer moderation in services and shelter, would reduce persistence risk and allow for earlier or more decisive policy easing.
Upside scenario — renewed persistence: Continued strength in services inflation or wage-sensitive categories would interrupt the disinflation process and reinforce the case for maintaining restrictive policy settings for longer.
Conclusion
Core CPI currently signals a regime of incomplete normalization. Underlying inflation pressures are easing, but only slowly, reflecting persistent rigidity in services and shelter components.
The central risk is not a renewed surge in inflation, but rather that core inflation remains too persistent to justify a confident and sustained easing cycle. As a result, core CPI is likely to remain a critical input into monetary policy decisions and market expectations in the coming quarters.