Why is the RBI governor obsessed with reining in core inflation

RBI is focusing on core inflation
RBI is focusing on core inflation

by 5paisa Research Team Last Updated: Jan 18, 2023 - 02:12 pm 3.4k Views

While the headline inflation has been under the 6% limit of the RBI for 2 months in succession, the RBI governor is far from pleased. He also wants core inflation to come within that band quickly as it still remains uncomfortably high. For the month of December 2022, the core inflation stood at 6.1% and it has hovered around these levels. In the core inflation basket, the pressure is not coming so much from the core sector goods as it is from the core sector services. The momentum of core inflation may have tapered in the last few months, but core inflation still remains sticky at around 6%. Hence it is the time to be extremely vigilant and policy makers cannot afford to let their guard down.

What exactly is core inflation. Incidentally, core inflation strips out the volatile components of food and fuel and the residual inflation is the core inflation. It is more sticky as it tends to be more structural in nature, unlike food and fuel inflation which is more cyclical in nature. Das has specifically noted that most of the fall in headline CPI (consumer price index) inflation in December has come from a decline in food prices and to a lesser extent in fuel prices. The core inflation has remained flat through this period. The other issue with core inflation is that the core inflation is less vulnerable to shifts in the repo rate. Despite a 225 bps hike in repo rates, the impact on core inflation has been minimal.

According to Das, the supply-side measures taken by the government, along with the easing of supply-chain bottlenecks can go a long way in reducing core inflation. Core inflation has global and domestic triggers and while the former is out of control, the latter can be controlled. For example, the reduction in taxes on fuels played a key role in bringing down core inflation to more manageable levels. These are the kind of fiscal policy measures that can be addressed through government policy.

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