What is Core Inflation?

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S&P Global Ratings recently said core inflation in India has been declining sequentially, and an elevated 6.25 percent policy rate limits the need for further rate hikes.

About Core Inflation: 

  • What is it? Core inflation is the change in the costs of goods and services but does not include those from the food and energy sectors.
  • Food and energy prices are exempt from this calculation because their prices can be too volatile or fluctuate wildly.
  • Why is it important?
  • Core inflation is used to determine the impact of rising prices on consumer income.
  • 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.
  • To deal with such situations, many central banks use measures of core inflation that are designed to filter the transitory price movements.
  • 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.
  • Core inflation is a convenient guide to help the central bank achieve its objective of controlling total inflation.


What is Headline Inflation?

  • It is the raw inflation figure reported through the Consumer Price Index (CPI).
  • The CPI determines inflation by calculating the prices of a fixed basket of goods.
  • Core inflation removes the CPI components that can exhibit large amounts of volatility from month to month.


Q1) What is Consumer Price Index (CPI)?

CPI measures retail inflation by collecting data on the prices of goods and services that are consumed by the retail population of the country. CPI meaning refers to an increase in the price level of a selected basket of goods and services over a select period of time.

Source: Declining core inflation limits need for further interest rate hikes by RBI: S&P Global Ratings