A distinction between core and non core inflation is often made from the perspective of monetary policy implementation. The logic of such a demarcation is due to the fact that the RBI need not or can’t influence prices rise when such price rises are temporary that occurs in the case of primary commodities like food.
Why there is the need for core and non core inflation?
For example, in the case of food inflation, it may have appeared instantly, due to sudden shortages. This price rise may disappear soon. If the RBI makes a monetary policy intervention for such seasonal or temporary inflation, the price rise may disappear by the time when the RBI’s policy becomes effective. Here, the monetary policy intervention becomes ineffective.
Core inflation, non-core inflation and headline inflation
The RBI should concentrate on targeting the inflation which is generally reflected on all goods and services. This inflation is called core inflation. The seasonal inflation element is the non-core. Core and non-core are the two parts of total inflation or what we call the headline inflation.
The transitory or seasonal inflation is removed from headline inflation to get core inflation. What the CPI and WPI figures shows to us is the headline inflation.
Core inflation which is also called underlying inflation, thus excludes seasonal inflationary factors such as food and energy costs.
The weakness of seasonality is thus that it may change next time and hence can’t be counted while taking long lasting policy measures. Headline figure is not adjusted for seasonality or for the often volatile elements of food and energy prices. This means that the RBI can’t consider the sudden and temporary rise in prices of items like food articles and fuel.