Consumer Price Index (CPI) Inflation - Core
Source: CMIE Economic Outlook, 1 Finance Research
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What does the Core CPI Inflation data represent?
- Core CPI Inflation data measures the changes in the price level of goods and services in an economy, excluding certain volatile items such as food and energy prices.
- This metric is used to assess the underlying demand trends, as it provides a clearer picture of inflation by removing elements that are prone to temporary price shocks.
What is the significance of the Core CPI Inflation data?
- Core CPI inflation reflects the inflationary trend unaffected by short-term volatility. It's a key indicator for policymakers to understand the persistent inflationary pressures and demand in the economy.
- The Reserve Bank of India (RBI) often focuses on core inflation to make informed decisions about monetary policy, as it indicates the need for tightening or loosening monetary conditions.
- Core inflation provides insights into the overall economic health, indicating whether the economy is overheating (high core inflation) or underperforming (low core inflation).
How to interpret the Core CPI Inflation data ?
- Inflation is measured by the Year-on-Year (YoY) percentage change in the level of the index. An increase in the index (over the month or over the year) indicates inflation (rising prices), while a decrease in the index suggests deflation (falling prices). A slowdown in the inflation rate suggests disinflation.
- Since 2016, RBI has adopted a flexible inflation targeting monetary policy framework that notifies 4% CPI inflation as the target, with an upper tolerance limit of 6% and a lower tolerance limit of 2%. Although there are no such targets for core inflation, when interpreting core CPI inflation, one should consider how this category's inflation rate aligns with the RBI's overall inflation target.
- Sharp changes in core inflation can influence the central bank's monetary policy and interest rate outlook. Higher core inflation might lead to higher interest rates, while lower core inflation could lead to lower rates.
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