Understanding the Dynamics of Core Inflation of Newly Created Consumer Price Indices of India

Abstract

The study examines the relationship between headline and core inflation for the Consumer Price lndex (CPI) and evaluates the suitability of the measures of core inflation. By using exclusion based measure two core measures have been constructed for newly created CPis: CPI (Rural): CPI Rural excluding Food Index, CPI Rural excluding Food and Fuel Index; CPI (Urban): CPI Urban excluding Food lndex ,CPI Urban excluding Food and Fuel Index; CPI (Combined): CPI Combined excluding Food Index ,CPI Combined excluding Food and Fuel Index. Test of Predictability , Test of Volatility and Test of Causality have been performed to find the suitable core measure. The CPI-Urban Excluding Food and Fuel has been found as the best core measure because (a)For all the three time periods ( 1, 2, and 3 months) the headline CPI-Urban reverted back to the core measure CPI-Urban Excluding Food and Fuel; (b)It ha s been found to be the least volatile measure; (c) It has unidirectional causality at both lags I and 2.