Core Inflation

Core Inflation

Subject: Economy

Section: Inflation

Why in the news?

Retail inflation based on the Consumer Price Index (CPI) surged to nearly 7 per cent, a 17- month high, in March even without capturing the full impact of the fuel price hike.

Core Inflation:

Inflation excluding ‘food and beverages’ and ‘fuel and light’ – the transitory components of the consumer price index.

Conventionally, core inflation is calculated by excluding ‘food and beverages’ and ‘fuel and light’ groups from overall inflation (CPI-C).

Refined core inflation

In the CPI-C these fuel items excluded from core are included in ‘transport and communication’, a subgroup under the miscellaneous group. Therefore, conventional ways of calculating retail core inflation, instead of excluding the volatile fuel items from core inflation, continue to include volatile fuel items in core inflation. As a result, the fuel price rise continues to impact core inflation.

A ‘refined’ core inflation was constructed to address this anomaly by excluding main fuel items viz., ‘petrol for vehicle’, ‘diesel for vehicle’ and ‘lubricants and other fuels for vehicles’, in addition to ‘food and beverages’ and ‘fuel and light’ from the headline retail inflation