CEIC News@lert: Exploring India’s Core Inflation

CEIC News@lert/India Premium Database - March 16, 2016 The subject of core inflation has been a perennial subject for analysts focusing on India’s inflation, especially in periods of high price volatility. As CEIC aim to present the various alternative interpretations of core inflation in the context of the Indian economy we have added the “Consumer Price Index excluding Food & Beverages and Fuel & Light” time series in the India Premium Database to complement its existing “Consumer Price Index excluding Food & Beverages” datasets. These datasets, alongside the other consumer inflation datasets, serve as measure of India’s core inflation. CORE INFLATION AND ITS SIGNIFICANCE Core inflation is a concept that describes the long-term trend in prices in a particular economy, excluding any transitory volatility, particularly from one-off supply shocks. Since core inflation is often reflective of long-term inflation expectations it may influence contractual wage and price arrangements. Policymakers often use core inflation, in tandem with headline inflation, to help to gauge underlying inflationary pressure from temporary volatility in price movements. Core inflation rates are generally derived by isolating persistent components of inflation either through exclusion, smoothing, reweighting or other adjustments. INFLATION IN INDIA The Central Statistics Office (CSO) does not publicly release data on core inflation or define a particular method for measuring core inflation. However, the CSO provides information on the constituent components of both the consumer price index (CPI) and wholesale price index (WPI), along with their associated weights to allow users to calculate their preferred measure of core inflation. One popular means of deriving core inflation is the “exclusion method”. Under this approach, components that are deemed volatile are permanently removed a priori from the price index. This simple method directly removes any influence of volatile components. Popular components for removal tend to be food and beverages and fuel given their traditionally volatile prices, which may be due to weather conditions in the former case, or for the latter because of an oil price shock, say. Other popular components for removal include housing due to the inherent volatility of property markets, which like energy prices can also be driven by speculation. Exclusion-based derivation has the advantage of being simple to construct, and easy to compare with other countries. CEIC offers two calculated measures of core inflation for India, namely the “CPI ex. Food and Beverages” and the “CPI ex. Food and Beverages, and Fuel and Light”. Given the high volatility of food and beverages in India, this component is a natural candidate for exclusion in the derivation of a core CPI. The exclusion of fuel and light, however, may be more debatable given its comparatively stable price changes relative to headline inflation. Nevertheless, the “CPI ex. Food and Beverages, and Fuel and Light” are added in the database to facilitate comparison to other economies, which may likewise exclude food and energy prices from the index. The impact of removing fuel and light from the exclusion-based CPI is marginal, in part due to the relatively low weight of that component in the CPI compilation (6.84%). The exclusion of food prices is more noticeable given it has a 45.86% weighting in the CPI computation. CORE INFLATION AND POLICY MAKING Headline inflation remains the de facto target as it more closely mirrors the full range of actual price changes faced by consumers and producers in the economy. This may be especially significant in India where food and beverages – one of the “volatile” components removed under the exclusion method – as mentioned, represents a significant share of the CPI basket. On the one hand, removing these volatile components is essential to deriving the “stable” inflation rate defined as core inflation. On the other hand, removing a large portion of CPI data makes it less relevant as an actual inflation measure affecting the general public. As such, any measures of core inflation should always be evaluated vis-à-vis headline inflation, particularly when it is derived through an exclusion method or its variants, which can include a trimmed mean calculation, or some other re-weighting of the price index components. Discuss this post and many other topics in our LinkedIn Group (you must be a LinkedIn member to participate). Request a Free Trial Subscription. Back to Blog
16th March 2016 CEIC News@lert: Exploring India’s Core Inflation