Core Inflation

Core inflation is a measure of underlying price pressure that generally excludes food and fuel prices from headline inflation. These items are removed because their prices often fluctuate sharply due to seasonal conditions, weather, international commodity prices and other supply shocks.

What is excluded

In India, the commonly used core CPI measure is derived from the Consumer Price Index by excluding its food and fuel groups. The exact exclusions may vary across institutions and analytical measures, so core inflation is not a single universally fixed index.

• Food is excluded because agricultural prices are strongly affected by harvests, weather, seasonality and supply disruptions.
• Fuel is excluded because energy prices are sensitive to global commodity prices, exchange rates, taxes and administered-price changes.

Why core inflation is measured

Removing volatile components helps reveal the more persistent and broad-based component of inflation. A sustained rise in core inflation may indicate that price pressures have spread to goods and services through wages, input costs, demand conditions or inflation expectations.

• Core inflation can help monetary authorities assess the persistence of inflation beyond temporary supply shocks.
• Comparison of core and headline inflation helps distinguish broad-based inflation from movements concentrated in food or energy.

Limits of the measure

Food and fuel occupy an important place in household consumption, particularly for poorer households, so excluding them does not measure the actual cost-of-living increase faced by consumers. Moreover, prolonged food or fuel inflation can feed into wages, transport costs and other prices through second-round effects.

• Core inflation is therefore an analytical indicator, not a substitute for headline CPI inflation.
• India's monetary policy framework targets inflation measured by the overall Consumer Price Index, rather than core inflation alone.