Core Inflation Calculation

We often hear economist and central bank referring core inflation supplementing their views. Economic advisor do not release core numbers with headline inflation. Core needs to be calculated after the headline number is out.

We know WPI is broadly divided into 3 categories:

• Primary Articles (20.12%)
• Fuel Index (14.91%)
• Manufacturing Products (64.97%)

From above three components food and fuel are not included in core inflation calculation since these are considered to be highly volatile and hence tend to be confusing.

Third component i.e. Manufacturing Products comprises of varieties of products which also include food items to some extent. Refer below breakup.

Food Products	9.97
Non Food Manufactured Prod.	55.00
Manufacturing Products	64.97

Hence to get near to accurate manufacturing inflation food component is removed from the manufacturing products number. Here we calculate Core Inflation with the help of Nov-2012 numbers. You can publicly get Food Products inflation numbers and total manufacturing products number. Using the two you can compute Non food manufacturing inflation also popularly known as core inflation.

Particulars	Weight	Nov-12 Numbers
Food Products	9.97(15.34%)	9.97%
Non Food Manufactured Prod.	55(84.65%)	????
Manufacturing Products	64.97(100%)	5.41%

Core Inflation = (5.41 -(15.34%*9.97))/84.64% i.e. 4.58%

RBI while formulating monetary policy to some extent factors spread between core and headline numbers.  Spread between core and headline WPI number indicates level of supply led Inflation/demand side inflation.

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