Core Inflation

11-03-2024

08:58 AM

1 min read

Prelims: Indian Economy

Overview:

Core inflation is likely to remain low, around 3% in the near term, owing to weak rural demand, softness in housing inflation, and lower input cost pressures, according to economists.

About Core Inflation

It is the change in the costs of goods and services excluding the price variations in seasonal elements, such as those related to food and energy.
Food and energy prices are exempt from this calculation because their prices can be too volatile or fluctuate wildly.
Core inflation represents the long-term trend in the price level.
Why is it important?
- It is used to determine the impact of rising prices on consumer income.
- To deal with such situations, many central banks use measures of core inflation that are designed to filter transitory price movements.
- If the increase in the price index is due to temporary shocks that could soon reverse themselves, it may not require any monetary policy action.
- On the other hand, prices of other commodities do not fluctuate as regularly as those of food and fuel: as such, increase in their prices could be taken relatively to be much more of a permanent nature.
- It follows logically for Central Banks to target only core inflation, as it reflects the demand-side pressure in the economy.
- Core inflation, by eliminating the volatile components from the headline helps in identifying the underlying trend in headline inflation and is believed to predict future inflation better.
- It is a convenient guide to help the central bank achieve its objective of controlling total inflation.
- Whenever core inflation rises, Central Banks increase their key policy rates to suck excess liquidity from the market, and vice versa. It is, therefore, a preferred tool for framing long-term policy.

What is Headline Inflation?

Headline inflation is the total inflation in an economy.
It is the raw inflation figure reported through the Consumer Price Index (CPI).
The headline inflation figure includes inflation in a basket of goods that includes commodities like food and energy.
It is different from core inflation, which excludes food and energy prices while calculating inflation.

Q1) What is Deflation?

Deflation is a general decline in prices for goods and services, typically associated with a contraction in the supply of money and credit in the economy. During deflation, the purchasing power of currency rises over time.

Source: Core inflation to stay around 3% till Q1 FY25: Economists