What is Core Inflation?

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.