Flexible inflation targeting, a good balance
Newspaper: The Hindu (Editorial), Page: 8
Subject: GS-3 (Economy – Monetary Policy, FIT, Phillips Curve, FRBM)
Headline inflation refers to the total inflation rate in an economy, measured by the overall change in the Consumer Price Index (CPI). It includes all categories of goods and services that households typically consume—food, fuel, housing, clothing, transportation, health, education, etc.
Because it includes food and fuel, whose prices fluctuate frequently due to weather events, geopolitical tensions, supply chain disruptions, and global oil price movements, headline inflation can be highly volatile.
Why it matters
- Reflects the actual cost-of-living for consumers.
- Important for understanding short-term inflation shocks.
- Influences public perception and political narratives around inflation.
- Essential for government’s welfare and price-stabilisation interventions.
Core Inflation
Core inflation is the measure of inflation that excludes highly volatile items, mainly food and fuel.
It focuses on the underlying, persistent inflationary trend in the economy. By removing components that fluctuate sharply month-to-month, core inflation offers a clearer view of long-term price pressures.
Typical categories included are:
housing, health, education, transportation services (excluding fuel), personal care, recreation, household goods, and clothing.
Why it matters
- Helps identify demand-driven inflation rather than temporary supply shocks.
- Provides a stable indicator for the RBI’s monetary policy decisions.
- Useful for analysing structural inflation—wages, rents, service sector prices, manufacturing costs.
Helps policymakers distinguish between temporary volatility and deep-rooted inflation pressures.
