CORE
INFLATION - ECONOMY
News:
Core Inflation Falls to
Lowest Level Since September 2021
What's
in the news?
●
Even as overall price stability has likely
been restored in the economy with core inflation softening to a three-year low
in the first quarter of 2023-24, the food inflation spike in June due to higher
prices for vegetables, fruit and pulses underscores the need for a guarded
approach.
Core
Inflation:
●
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.
Significance:
●
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.
Go
back to basics:
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.