How to Understand Core Inflation — CPI vs Core Inflation

Inflation — Not as Simple as You Think

When media reports "inflation is 4%", they're talking about the CPI indicator. But this is just one way to measure price increases. For a conscious investor, core inflation is equally important — and understanding how they differ can change the way you evaluate your savings, plan investments, and set long-term financial goals.

Most people treat inflation as a single number. They hear it on the evening news, glance at the headline, and move on. But the reality is more nuanced. Inflation is measured in several ways, each telling a slightly different story about what's happening with prices in the economy. If you want to make smart financial decisions — whether that's choosing between a fixed-rate mortgage or a variable one, picking the right bonds, or simply understanding whether your savings account is actually growing in real terms — you need to understand the difference between headline inflation (CPI) and core inflation.

CPI — Consumer Price Index

What does it measure?

CPI (Consumer Price Index) measures the change in prices of a basket of goods and services purchased by the average household. In Poland, GUS (Główny Urząd Statystyczny — Statistics Poland) checks prices of hundreds of products monthly and calculates the average change. The basket is designed to reflect typical consumer spending patterns, and it gets updated periodically to account for shifts in how people actually spend their money.

What does the CPI basket contain?

The CPI basket in Poland is divided into major categories with approximate weights:

• Food and non-alcoholic beverages (~25% of basket) — bread, meat, dairy, fruits, vegetables
• Housing and energy (~20%) — rent, utilities, electricity, gas, heating
• Transport (~10%) — fuel, public transport, car purchases and maintenance
• Clothing and footwear (~5%)
• Health (~5%) — medications, doctor visits, medical equipment
• Education (~1-2%) — tuition fees, school supplies
• Recreation and culture (~6%) — electronics, books, sports, travel
• Restaurants and hotels (~5%)
• Communication (~4%) — phone plans, internet
• Other goods and services — remaining categories

GUS sends price collectors to stores, markets, and service providers across Poland every month. They record thousands of individual prices and feed them into the calculation. The result is a single percentage that represents how much more (or less) the average consumer is paying compared to the same month last year.

Why CPI matters

CPI is the most widely reported inflation figure. It directly affects:

• Government policy — social benefits, pensions, and minimum wage are often indexed to CPI
• Financial contracts — many rental agreements, insurance premiums, and business contracts reference CPI for annual adjustments
• Public perception — it shapes how consumers feel about the economy and influences spending behavior
• Inflation-indexed bonds — Polish Treasury bonds like COI and EDO use CPI as their reference rate

The problem with CPI

CPI is very sensitive to supply shocks. When oil prices jump 50% or drought destroys crops, CPI shoots up — even if the rest of the economy is stable. This is "noise" that makes it difficult to assess the real inflationary trend.

Consider what happened during 2022-2023 in Poland. Energy prices skyrocketed due to the war in Ukraine, pushing CPI above 18% at its peak. But was the entire economy really overheating at that rate? Not necessarily. Much of that spike was driven by external energy shocks, not by domestic demand pressures. CPI captured the full impact of those shocks, making it harder to distinguish between temporary price spikes and lasting inflationary trends.

Another issue is that CPI can be misleading in the opposite direction too. Government interventions like price caps on energy or fuel tax reductions can artificially suppress CPI without actually reducing underlying price pressures. When those interventions expire, CPI rebounds — creating volatility that doesn't reflect real economic conditions.

Core Inflation — Signal Without Noise

What is it?

Core inflation is CPI after excluding the most volatile components — usually food and energy prices. NBP (National Bank of Poland) publishes several measures of core inflation, each filtering out different types of price volatility:

• Excluding food and energy prices — the most popular and widely cited measure. Strips out the two categories most subject to external shocks
• Excluding administered prices — removes prices set or heavily influenced by the state (regulated energy tariffs, public transport fares, postal services)
• 15% trimmed mean — excludes the 15% most extreme price changes on both the high and low end, giving a picture of "typical" price movement
• Net inflation — excludes food and fuel prices specifically

Each measure serves a slightly different purpose, but they all aim at the same goal: revealing the persistent, underlying trend in price growth that reflects genuine demand pressures in the economy.

Why is it more important for investors?

Core inflation shows persistent price trends in the economy. If CPI falls because oil became cheaper, it doesn't mean inflationary pressure has disappeared. Core inflation will confirm or deny this.

Central bankers — including members of Poland's Monetary Policy Council (RPP) — pay close attention to core inflation because it tells them whether the economy is generating sustained price pressures that require monetary policy action. A temporary spike in food prices due to a bad harvest doesn't call for interest rate hikes. But if core inflation is climbing steadily, it signals that broad-based price pressures are building, and rate increases may be warranted.

For individual investors, core inflation provides a more reliable benchmark for evaluating real returns. If you're earning 6% on a savings account but core inflation is running at 5%, your real purchasing power gain is only about 1% — regardless of what headline CPI says.

How core inflation behaves differently

Core inflation tends to be "stickier" than headline CPI. It rises more slowly during supply shocks but also falls more slowly when those shocks fade. This is because core inflation captures price changes driven by wages, rent, services, and other components that adjust gradually based on economic conditions rather than commodity markets.

In Poland's recent history, we saw this pattern clearly: CPI peaked above 18% in early 2023 and dropped sharply as energy prices stabilized. But core inflation remained elevated at around 7-8% well into 2024, signaling that domestic price pressures hadn't fully dissipated. This divergence had real implications for interest rate expectations and investment returns.

Practical Example

Imagine this situation:

CPI is falling fast — looks optimistic. But core inflation barely moved. This means the CPI drop is mainly due to cheaper energy or food, while fundamental price pressure remains high.

Now consider how this plays out in practice. Politicians might celebrate the falling CPI numbers and claim victory over inflation. But the central bank, watching core inflation remain stubbornly high, may keep interest rates elevated longer than the market expects. For you as an investor, this means:

• Fixed-rate bonds bought during the high-rate period retain their value longer
• Variable-rate mortgage holders shouldn't expect relief soon
• Cash deposits may continue offering decent nominal returns — but real returns measured against core inflation remain thin

A real-world Polish example

During late 2024 and into 2025, Poland experienced exactly this scenario. CPI declined from double digits to mid-single digits thanks to base effects and stabilizing energy markets. But core inflation, especially in services, remained sticky. This made the RPP cautious about cutting rates, which in turn affected everything from mortgage costs to bond yields to the exchange rate of the zloty.

What This Means for Your Finances

Savings

If your deposit yields 5% and core inflation is 4.5% — your real profit is only 0.5%. Look at core inflation, not headline inflation, when evaluating real returns. Many savers make the mistake of feeling comfortable when their deposit rate exceeds CPI, not realizing that core inflation is eating away at their purchasing power more consistently.

For example, if CPI drops to 3% because of a temporary oil price slump, but core inflation remains at 4.5%, your 5% deposit looks great versus CPI but is actually losing purchasing power when measured against underlying price trends. The oil price will eventually recover, CPI will bounce back, but core inflation was telling you the truth all along.

Interest rates and monetary policy

RPP (Monetary Policy Council) looks at core inflation when deciding on rates. Even if CPI falls, with persistent core inflation, rates may remain high — affecting loans, bonds, and the real estate market. Understanding this dynamic helps you anticipate:

• When rate cuts might come — not when CPI drops, but when core inflation trends downward
• How to time fixed-rate decisions — locking in a fixed mortgage rate makes more sense when core inflation suggests rates will stay high
• Bond strategy — if core inflation is falling, longer-duration bonds become attractive as future rate cuts will boost their prices

Investments

Different asset classes respond differently to headline and core inflation:

• Inflation-indexed bonds (COI, EDO) protect against CPI — but CPI and core inflation can diverge significantly. During periods when CPI drops due to energy prices but core stays high, your indexed bonds may underperform versus what the actual cost-of-living increase feels like
• Stocks — in the long term, companies pass costs to consumers, protecting against inflation. Companies with strong pricing power (think consumer staples, utilities) tend to do well when core inflation is elevated
• Real estate — rents usually rise with core inflation, making property a decent hedge against persistent price pressures. In Poland, rental yields in major cities have broadly tracked core inflation over the past decade
• Gold and commodities — often respond more to headline CPI shocks than core inflation, as they're driven by the same supply-side factors
• Cash and deposits — their real value erodes based on whichever inflation measure you use. Core inflation gives you the more honest picture

Wage negotiations

If you're negotiating a salary increase, core inflation is a better reference point than CPI. Employers who offer raises "matching inflation" based on a temporarily low CPI figure are effectively cutting your real pay if core inflation remains higher. Know your numbers and use them in discussions.

Where to Check Data?

• GUS (stat.gov.pl) — monthly CPI inflation report, usually published around the 15th of each month
• NBP (nbp.pl) — core inflation measures, published with approximately a 2-week delay after CPI. Check the "Monetary Policy" section for detailed breakdowns
• Trading Economics — historical charts and international comparisons, useful for seeing how Poland compares to eurozone or US trends
• Eurostat — HICP (Harmonised Index of Consumer Prices) for cross-country comparisons within the EU
• OECD Data — longer-term inflation trends and economic outlook

How to read the data

When checking inflation figures, always look at:

1. Year-over-year (YoY) — the standard comparison, showing price change versus the same month last year
2. Month-over-month (MoM) — useful for spotting trends, but can be volatile
3. The gap between CPI and core — a widening gap signals temporary supply shocks; a narrowing gap means the underlying trend is catching up to or falling toward headline figures

Common Misconceptions About Inflation

"Low CPI means inflation is under control"

Not necessarily. If core inflation remains high while CPI drops, it means only the volatile components have calmed down. The underlying trend may still be problematic.

"My personal inflation equals CPI"

Your personal inflation depends on your spending pattern. If you spend heavily on services (which are captured more in core inflation), your experienced inflation may be higher than CPI suggests. Someone who rarely drives but eats out frequently will experience a different inflation rate than the CPI average.

"Inflation always hurts"

Moderate, stable inflation (around 2-3%) is actually considered healthy for an economy. It encourages spending and investment rather than hoarding cash. The problem is when inflation is high, volatile, or when there's a disconnect between what different measures show.

How Freenance Can Help

Freenance considers inflation when calculating your financial goals and Financial Freedom Runway. You see how the real value of your savings changes over time and whether your investments actually beat inflation — not nominally, but in real terms. The app factors in both headline and underlying price trends to give you a realistic picture of your progress toward financial independence.

By tracking all your accounts, investments, and expenses in one place, Freenance helps you understand whether your wealth is genuinely growing or just keeping pace with rising prices. This is especially valuable during periods when CPI and core inflation diverge — you get the full picture instead of a misleading snapshot.

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