Food price shocks, a risk to inflation

Food price shocks, a risk to inflation

Subject: Economy

Section: Monetary Policy

Details:

Even though CPI inflation has been projected at 5.4%for 2023-24by the Monetary Policy Committee(MPC), a moderation from6.7% in 2022-23,headline inflation remains vulnerable to recurring and overlapping food price shocks.

Core inflation has also moderated by 170 basis points since its recent peak in January 2023

Core Inflation:

Core inflation represents the long-term trend in the price level and factors out short-term volatility caused by external factors such as energy and food prices. It excludes highly volatile commodities like food and energy, which can undergo rapid price fluctuations due to seasonal and market conditions. By eliminating these volatile elements, core inflation provides a more accurate reflection of the underlying inflationary trends in the economy.

Central banks often use core inflation as a key indicator when formulating monetary policies and making adjustments to interest rates. It allows policymakers to focus on the persistent inflationary pressures in the economy, enabling them to make informed decisions that can maintain price stability and promote sustainable economic growth.

Headline Inflation

Headline Inflation refers to the complete inflation figure including all goods and services within the consumer price index basket. It encompasses all items, including those that are highly volatile, such as food and energy. Headline inflation is the most commonly reported measure of inflation and is what is typically referenced in the news and by the general public. While headline inflation provides a comprehensive view of the overall price levels, it can be influenced by temporary factors that do not reflect the underlying inflationary pressures.