Differences Between Headline and Core Inflation Explained

Headline inflation is the measure of the aggregated inflation within an economy, i.e., the total inflation figure measured via the Consumer Price Index (CPI). This is inclusive of commodities like energy and food prices.

The Bureau of Labour Statistics releases headline inflation monthly to determine the CPI. Taking the base year as a starting point, it calculates the current year’s prices. Unlike core inflation, headline inflation takes into account other inflation rates.

Is Headline Inflation CPI or WPI?

Headline inflation is measured using the Consumer Price Index (CPI). The CPI calculates the cost of purchasing a fixed basket of goods to determine the rate of inflation in the broader economy.

It takes into account a base year and indexes the current year's commodity prices in accordance with the base year’s values. This helps determine the economy's raw or total inflation, which is represented by headline inflation.

Temporary and permanent changes in inflation continue. Core inflation, which gathers around the total cost of inflation faced by the economy, is also known as underlying inflation.

RBI always tries to keep it under watch because an increase in core inflation will put the country’s economy into disorder.

What is an Example of Core Inflation?

Is CPI Core Inflation?

What is the Core Inflation Rate in India?

Volatile Nature of Products

Since food and fuel are a major part of headline inflation and pave the way in the economy, it is also known as short-term inflation. This is so because the presence of volatile elements, such as food, fuel, etc., initiates random changes in the cost of production.

For example, food prices may rise because of environmental crises as demand increases. Moreover, due to war or some related reason, oil prices might face a brutal rise, especially if it is imported from outside.

Unit of Measurement

The Wholesale Price Index, or WPI, is generally used to track headline inflation. This is so because it helps to concentrate on the amount producers charge the buyers rather than the amount people pay.

Setting this perspective from the producer is significant as it decodes wholesale market prices, which helps understand how money flows. India initiated the Consumer Price Index (CPI) later, and is used as needed.

Effect on Common Mass

Food, clothing, transportation, etc., are necessary parts of any average person's daily life. An increase or decrease in the economy facilitates price changes in their routine life. Various factors that affect inflation will bring change to the common people.

Keeping this change on track and maintaining economic balance requires an accurate calculation of headline inflation to see how it increases or decreases and how to keep the balance intact.

Stable Nature of Products

Since core inflation subtracts the volatile products from its calculation, it gives a more stable and accurate result. It helps in showing the country's economic status. It doesn’t carry any fluctuating ability like headline inflation, which also goes by long-term inflation.

Thus, calculation is crucial in making long-term economic decisions.

Unit of Measurement

Effect on Common People

If core inflation is affected, the country’s economy will suffer. This is because if the cost of products increases while the consumer doesn't have enough money, the purchasing limit will drop.

Alternatively, if the opposite happens, which is an increase in consumer purchasing power but a fall or constancy in product cost, consumers will have more ability to buy. If the balance is not struck between these scenarios, both will cause grave damage to the economy.

1. Consumer Price Index (CPI)

2. Wholesale Price Index (WPI)

Unlike CPI, WPI is measured by considering the price of bulk goods. Consumers don't play a direct role here. Hence, few countries consider WPI when calculating inflation rates.

Inflation still seems to be one of the crucial factors in India’s current context. Headline inflation vs. core inflation is one of the basic concepts. They are the bricks of making these calculations to support further economic proof.