Context:
India’s headline inflation might appear comfortably low, but a deeper concern is brewing beneath the surface — rising core inflation, which excludes food and fuel prices. This trend may have critical implications for the RBI’s monetary policy stance, especially the trajectory of future rate cuts.
Core Inflation
Core inflation is a type of inflation measure which seeks to represent the underlying long-run trend of aggregate price levels in the economy. This is achieved by removing certain items exhibiting short-term significant price fluctuations within the overall consumer basket.
Recent Inflation Trends
- Headline CPI inflation has remained below RBI’s 4% target since February 2025.
- June 2025 CPI: 2.1% (lowest in months).
- In contrast, core inflation rose from 3.6% in January to 4.5% in June.
Why Core Inflation Matters
- Core inflation filters out volatile components (food & fuel), revealing underlying price pressures.
- Historically, headline inflation tends to converge to core inflation, especially after temporary supply shocks fade.
- RBI and economists view it as a forward-looking indicator of long-term inflation trends.
Policy Implications
- If core inflation rises further (e.g., to 6%), it could drive up headline inflation in the future.
- This would restrict the RBI’s ability to cut rates further, threatening the current easing cycle.
- A similar pattern in 2018 led the RBI to tighten rates due to persistent high core inflation driven by housing and transport costs.
Decomposition and International Practices
- Countries like the US, Singapore, and Europe exclude more than just food and fuel in core inflation measures.
- RBI has recently experimented with a core inflation measure excluding petrol, diesel, gold, and silver.
- A Crisil report suggests that excluding gold alone reduces core inflation by 80 basis points.
