What Are the Differences Between Headline and Core Inflation?

Headline inflation is the measure of the aggregated inflation within an economy, i.e., the total inflation figure measured via the Consumer Price Index (CPI). This is inclusive of commodities like energy and food prices.

This gets released by The Bureau of Labour Statistics every month to determine the CPI. Taking hold of the base year, it calculates the current year’s prices. Unlike core inflation, headline inflation takes into account other inflation rates.

Temporary and permanent changes in inflation keep on happening. Amongst those, core inflation gathers around total cost of inflation faced by the economy. It also goes by the name of underlying inflation.

RBI always try to keep it under watch because an increase in core inflation will put off the country’s economy into disorder.

Following are some of the factors of headline inflation that assert its definition:

• Volatile Nature of Products: Since food and fuel are a major part of headline inflation and pave the way in the economy, it also goes by short-term inflation. This is so because the presence of volatile elements, such as food, fuel etc., initiates random changes in the cost of production. For example, food prices may rise because of some environmental crises as their demands increase. Moreover, due to war or some related reason, oil prices might face a brutal rise, especially if it is imported from outside.
• Unit of Measurement: The Wholesale Price Index, or WPI, is generally used to track headline inflation. This is so because it helps to concentrate on the amount producers charge the buyers rather than the amount people pay. Setting this perspective from the producer is significant as it decodes wholesale market prices, which helps understand the way the money flows. India initiated the Consumer Price Index or CPI later, and it is used as per need.
• Effect on Common Mass: Food, clothing, transportation etc, is a necessary part of any average person's daily life. An increase or decrease in economy facilitates the price change in their routine life. Various factors that affect inflation will bring change in common people. Keeping this change on track and maintaining economic balance requires an accurate calculation of headline inflation to see how it increases, decreases and how to keep the balance intact.

Following are some of the factors that define core inflation:

• Stable Nature of Products: Since core inflation subtracts the volatile products from its calculation, it gives a more stable and accurate result. It helps in showing the country's economic status. It doesn’t carry any fluctuating ability like headline inflation, which also goes by long-term inflation. Thus in making long-term economic decisions, its calculation is the most crucial.
• Unit of Measurement: There is no single measurement process in India, like CPI or WPI. Hence there are no fixed ways of measuring core inflation.
• Effect on Common People: There is an overall effect on the country’s economy if the core inflation gets affected. This is because if the cost of products increases while the consumer doesn't have enough money, then the purchasing limit will drop. Alternatively, if the opposite happens, which is increase in consumer purchasing power but a fall or constancy in product cost, then consumers will have more ability to buy. Both these scenarios will cause grave damage to the economy if the balance is not put between them.

• Consumer Price Index (CPI): It indicates the price change over the goods that consumers use on a daily basis. This includes costs of housing, transportation, food etc.   It helps in the calculation of headline inflation and core inflation over a given period of time. CPI is also the symbol of inflation rate calculation in most countries.
• Wholesale Price Index (WPI): Unlike CPI, the measurement of WPI happens by considering the price of bulk goods. Consumers don't play a direct role here. Hence few countries consider WPI while calculating inflation rates.

Inflation still seems to be one of the crucial factors in India’s current context. Standing on this, headline inflation vs core inflation is one of the basic concepts. This is so because they are the bricks of making these calculations to support further economic proof.