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Refined Core Inflation: Definition, Background & Challenges UPSC Notes
IMPORTANT LINKS
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Syllabus |
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Topics for Prelims |
Refined Core Inflation, Standard Core Inflation, RBI, Consumer Price Index (CPI), Food Inflation, Consumer Food Price Index (CFPI), Core Inflation, Rupee Depreciation, Foreign Investment. |
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Topics for Mains |
Easing inflation and related concerns, Fiscal Policy, Inclusive Growth, Monetary policy, and Inflation management. |
What is Core Refined Inflation?
The economic survey says a "refined Core inflation" has been formed to exclude the volatile fuel articles. The articles "Petrol for a Vehicle," "Lubricants & Other Fuels for Vehicles," and "Diesel for a Vehicle," in addition to "Fuel and Light" and "Food and Beverages," have been excluded from headline retail inflation. Refined core inflation is nothing but a modified form of core inflation. This version of core inflation displays the trends of long-term inflation.
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Background of Retail Inflation
For the past couple of years, the Indian economy has been disturbed by inflation. Inflation, in particular, has been aggravated by a supply chain problem and the bursting of pent-up needs. This impulsive burst in the pent-up market has sent power, food, non-food items, and input costs winding worldwide – egged on by the disturbance of global supply chains and increasing shipment prices in India and worldwide. It also goes more deeply into the dynamics of inflation calculation in India. "Core inflation" is traditionally estimated by excluding food, beverages, fuel, and light groups from general inflation.
"While in CPI-C (Consumer Price Index-Combined), primary fuel entities such as 'diesel for a vehicle,' and 'petrol for vehicle' which have rather large weights, are not composed of 'fuel and light.' These fuel items are in 'transport and communication,' a subgroup under the various groups. Therefore, the traditional way of figuring retail core inflation, rather than banning the volatile fuel items from core inflation, continues to include volatile fuel items in core inflation. As a result, the rise in fuel prices continues to affect core inflation".
How Does It Vary from Other Inflation Calculations?
- Headline inflation contains all items.
- Core inflation bans food and fuel.
- Refined core inflation excludes more noisy items than core inflation.
- It provides a steady and uniform trend.
Why Refined Core Inflation Matters?
- It removes strong fluctuations.
- It allows RBI to better economic policy.
- It enhances economic forecasting.
- It displays exact inflation pressure.
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Prime Details of Refined Core Inflation
The following are the important points about Refined Core Inflation that you must know –
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Items Excluded In Refined Core Inflation
Items excluded in refined core inflation are those with highly volatile prices that do not reflect the long-term trend of inflation. These include –
- Vegetables
- Pulses
- Petrol and Diesel
- LPG
- Gold and Silver
These items are removed because –
- Their prices change fast.
- They do not reflect long-term trends.
- They cause confusion in inflation data.
Prices of these items are highly volatile, influenced by factors like weather, global markets, and government policies. They do not reflect long-term inflation trends and can distort the real picture of inflation. By excluding these, economists can focus on stable and meaningful inflation data for better policy decisions.
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Refined Core Inflation & Its Measuring Challenges
Difficulties in measuring inflation include. Changes in the quality of goods. Changes in the quality of goods mean that price rises may not reflect inflation but just the fact it is an improved good. The problem is that there is no single agreed approach or method of measuring core inflation because it is unobservable and must be estimated. This task is a difficult one. Ore inflation is the change in the costs of goods and services but does not include those from the food and energy sector. This measure of inflation excludes these items because their prices are much more volatile.
Primary Challenges
- No standard method exists.
- It varies with time and data.
- Needs expert judgment.
- Not reported officially in India.
Usefulness
- Helps researchers and economists.
- Makes inflation policy more stable.
- Reduces overreaction to short-term shocks
Difference Between Core Inflation & Refined Core Inflation
Core inflation and refined core inflation are both measures of inflation that exclude volatile food and fuel prices to provide a clearer picture of underlying price trends. However, refined core inflation goes further by excluding specific fuel items within the "transport and communication" category that are still included in conventional core inflation. This makes refined core inflation a more sophisticated measure of underlying inflation, particularly in cases where fuel prices significantly impact core inflation. A "refined" Core inflation has been constructed to exclude the volatile fuel items. The items of "petrol for a vehicle," "diesel for a vehicle," and "lubricants & other fuels for automobiles," in addition to "fuel and light" and "food and beverages," have been excluded from headline retail inflation.
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Types of Inflation |
Includes |
Excludes |
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Core Inflation
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All items minus food and fuel
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Food and fuel
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Refined Core Inflation
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Removes extra volatile items
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Food, fuel, and more volatile items |
Know more about Wholesale Price Index (WPI) for UPSC Exams!
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Key Takeaways on Refined Core Inflation for UPSC Aspirants!
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Download Refined Core Inflation Key Takeaways PDF
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Subject-wise Prelims Previous Year Questions |
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Refined Core Inflation UPSC FAQs
What is excluded from refined core inflation?
Core inflation is the change in the costs of goods and services but does not include those from the food and energy sectors.
What are the determinants of core inflation?
Based on the results of empirical testing, core inflation is influenced by demand factors in the long run.
Why does the RBI shift from WPI to CPI?
On the Urjit Patel Committee's (2014) recommendation, the Reserve Bank of India (RBI) shifted from WPI to CPI as its primary inflation measure.
What two groups of people are most hurt by inflation?
Such inflations lead to welfare losses, which are largest for younger, less-educated households and retirement-age college-educated households.
Which is the best measure of inflation?
The Consumer Price Index (CPI).