22nd July 2025 (15 Topics)
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Core Inflation Rises
Context
Despite headline inflation remaining below RBI's medium-term target of 4%, core inflation has increased from 3.6% to 4.5% between January and June 2025, raising concerns over future monetary policy decisions.
Core Inflation:
- Core inflation refers to the rate of inflation after excluding volatile components such as food and fuel prices. It provides a clearer picture of the underlying inflation trend in the economy.
Current Trends:
- As per the latest data, headline inflation has softened (2.1% in June 2025), but core inflation has increased to 4.5%.
- Such divergence between headline and core inflation is significant because headline inflation tends to converge with core inflation over time.
RBI’s Role & Policy Implications:
- Although the Reserve Bank of India (RBI) targets headline CPI inflation (with a band of 2% to 6%), core inflation acts as a leading indicator of inflationary pressures.
- Persistent core inflation may delay further monetary easing (repo rate cuts), despite low headline figures.
International Comparison:
- Different countries exclude varying items in core inflation calculation. For instance, the US excludes food and energy, while Japan excludes fresh food items. India excludes food and fuel.
Analytical Framework:
- RBI uses multiple core inflation measures, including those excluding gold, silver, petrol, and diesel.
- Increasing the frequency and scope of such disaggregated analysis may help refine monetary policy responses.
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