Core Inflation is an economic concept that represents the underlying, long-term trend in the price level of goods and services. It is distinct from Headline Inflation, which is the total inflation figure for a period.
The concept of core inflation is generally attributed to economist Otto Eckstein in 1981. Its purpose is to filter out temporary price shocks that do not reflect persistent inflationary pressures, thereby providing a clearer signal for monetary policy. In India, the Reserve Bank of India (RBI) adopted flexible inflation targeting as its explicit monetary policy goal, which highlighted the importance of distinguishing between core and non-core inflation.
Core inflation is calculated by taking the Headline Inflation measure and excluding the most volatile components, which are primarily food and beverages and fuel and light. Since April 2014, India's main measure of inflation has been the Consumer Price Index-Combined (CPI-C). By removing the volatile prices of food (which are often affected by monsoons or supply-side factors) and fuel (which is sensitive to global oil prices), the resulting Core CPI becomes more stable and reflects demand-side pressures in the economy.
This concept is central to the work of the Monetary Policy Committee (MPC), which uses core inflation to guide its interest rate decisions. The RBI's inflation targeting framework aims to keep CPI inflation at 4% with a tolerance band of +/- 2% (i.e., 2% to 6%). While the RBI tracks both measures, core inflation is considered a better indicator of the effectiveness of monetary policy, as its components are more responsive to interest rate changes than food and fuel prices.
The inflation targeting framework's target of 4% +/- 2% was kept unchanged for the period 2021 to 2026. A recent change in the calculation involved the Ministry of Statistics and Programme Implementation providing Core CPI data with a base year of 2024=100, replacing the earlier 2012=100 base, prior to January 2026.