What Are the Differences Between Headline and Core Inflation?

What Is Headline Inflation?

What Is Core Inflation?

What Are the Differences Between Headline Inflation vs Core Inflation?

Following are the differences between headline inflation and core inflation:

Criteria

Core Inflation

Headline Inflation

Meaning

The price change indicates inflation.

The total calculated price that measures inflation.

Volatility

It doesn't include products like food, fuel etc., because those are volatile, and their rates are constantly changing.

Includes the price of food, fuels etc., because it takes the gross amount of inflation into consideration.

Stability

Since the calculation of volatile products stays excluded, the amount is more accurate and stable. It stays primarily constant.

It keeps changing because of changes in CPI of volatile products.

Affected People

As per changing core, inflation affects the country's economy on an overall level.

This kind of inflation clearly reflects how it influences the common mass.

What Are the Factors Defining Headline Inflation?

What Are the Factors Defining Core Inflation?

Terms to Understand About Inflation

FAQs About Headline Inflation vs Core Inflation

How are headline and core inflation measured? up-arrow

In India, headline or core inflation is not explicitly measured with CPI or WPI method. Instead, yearly percentage change in WPI is used for headline inflation calculation. CPI is also broken into three parts to have a better understanding of the CPI rates:

  • CPI (urban)
  • CPI (rural)
  • CPI (all India)

If core inflation increases, will headline inflation increase? up-arrow

Since core inflation is equal to headline inflation, except for the amount of volatile products, if core inflation increases, it is not necessary for headline inflation to increase. It depends on the volatility of products. If that increases, then headline inflation will change accordingly.

Why does RBI prefer core inflation for their repo rate calculation? up-arrow

Headline inflation constantly fluctuates depending on the cost of products, whereas core inflation stays comparatively more accurate. Hence RBI considers core inflation rates so that accuracy is maintained while calculating the interest rates.

Moreover, core inflation equates to the country's overall economic health, whereas headline inflation highlights more on the financial condition of the common mass.

How does RBI curb an increase in core inflation? up-arrow

If core inflation increases, then it will mean that consumers have more purchasing power than necessary. Here RBI turns up repo rates or interest rates that they offer the commercial banks so that money flow decreases. Therefore regaining a balance between product cost and purchasing power of consumers keeps it intact.