Differentiate between headline inflation and core inflations Pdf

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Differentiate between headline inflation and core inflations Pdf

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Differentiate between headline inflation and core inflations Pdf

Differentiate between headline inflation and core inflations Pdf

What is Inflation ?

Inflation can be defined as increase in price levels over a period of time, based on the basket of goods selected to access the price changes it can be categorized.

Headline inflation is more CPI based as it measures the difference in inflation by calculating in prices of a basket of goods. Image below is the trend of CPI inflation of the last 5 years. So if you take a look at it the consumer element actually has an upward pressure on inflation but overall as shown in the 2nd image, inflation has actually gone down during the same time.

Core inflation is a measure of inflation which does not include CPI components such as food, energy, fuel etc. It is the more stable variant and focuses on general increase in price levels over the long-term. The Inflation rate in India is reported in CPI terms, but the overall inflation has been low in comparison to the increasing costs in the consumer consumption cost basket.

  • Headline Inflation refers to overall change in price level and is susceptible to supply shocks where as core inflation gives the underlying trend of inflation by exempting goods and services whose prices are highly volatile.
  • Fluctuations in headline inflation are usually temporary in nature while core inflation gives the expectations for a long run.
  • Changes in headline inflation have immediate and stronger impact on low and middle classes when compared to core inflation.

Importance of headline and core inflation for the economy –

Headline inflationCore Inflation 
  • Basic needs – Rapid increase in headline inflation owing to temporary shocks might deprive people from accessing basic needs.
  • Consumer Expectations – Change in consumer expectations has a potential to impact the economy.
  • Monetary Policy Target – Headline inflation is targeted to absorb any temporary shocks, thus plays a major role in determining the policy rate , money supply etc.
  • Headline inflation is used by RBI to modify monetary policy to maintain price stability in medium-to-long term; and protect ordinary citizens from inflation
  • Core inflation has long term impact on the economy and individuals as it targets needs such as transport , communications etc.
  • Core inflation has huge impact on the industrial sector and there by potentially impact countries exports.
  • Though not directly used as a target for monetary policy, plays a crucial role in determining RBIs policy stance.
  • Controlling the temporary rise in headline inflation will help reverting headline inflation level to core inflation which depicts the long term picture.
  • Helps in long term planning considering major sectors inflation projects for RBI

Both these rates are important for RBI in its monetary policy and should not be overlooked. Therefore GOI should

  1.  Include core targets in MPC agenda
  2. Monitoring supply shocks to headline mandatory for RBI
  3. Sustainability of CPI to be measured
  4. Inter effects of core and headline to be monitored considering cumulative figures might hide individual facts.
By |March 8th, 2017|UPSC 2017|

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