Core Inflation is also known as underlying inflation, is a measure of inflation which excludes items that face volatile price movement, notably food and energy i.e. Core Inflation is nothing but Headline Inflation minus inflation that is contributed by food and energy commodities.
To understand the concept in a better way we can say that food and fuel prices may go up in the short run due to some disturbance in the agriculture sector or oil economy. However, over the long term they tend to revert back to their normal trend growth. On the other hand, prices of other commodities do not fluctuate as regularly as food and fuel – as such increase in their prices could be taken relatively to be much more of a permanent nature.
And this is the reason Central Banks around the World always keep an eye on the core inflation. Whenever core inflation rises, Central Banks increase their key policy rates to suck excess liquidity from the market and vice versa. It is, therefore, a preferred tool for framing long-term policy.
