Difference Between Core Inflation and Headline Inflation

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John is assigned the job of a coach of the school cricket team. For the next few days, he ascertains the strength and weakness of each player. He realizes that there is one player in the team called Sam whose performance is very erratic. Though talented, he experiences severe mood swings. On certain days when he is charged up, his performance is exceptional and he can change the outcome of a match. However, on other days when his game is lackluster, the team's performance is markedly mediocre.

While John does not like the mood swings of his key player, he has to select him most of the time because of his exceptional skills. However, when asked by the school board about the overall performance of the team, he chooses to exclude Sam while calculating team's performance as a whole. This is because the volatility of his performance would paint an incorrect picture about the performance of the team as a whole. In a good quarter when Sam has been at his best, the overall performance of the team would look brilliant while in another quarter where Sam was lackluster, it could look dismal.

Headline inflation and Core inflation are two concepts which are very similar to the above situation. While Headline inflation judges the increase in prices over a year of a basket of goods, this basket contains products which are like Sam i.e. volatile in terms of their individual prices. So to get a better understanding of inflation, just as John removed Sam for the purpose of calculating team's performance, similarly, volatile products are removed from the basket that determines Headline Inflation. And once these volatile products are removed, the remaining products give a better estimate of the overall inflation trend in the country. This is known as Core Inflation. Crude oil is one such product which displays price swings based on global economic conditions that are beyond the control of local policymakers.

Trust the above story has explained the difference between Core Inflation and Headline Inflation.

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