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.
- 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.
