Retail core inflation is calculated excluding which of the following? 1. Food and beverages 2. Fuel and light 3. Transport and communication 4. Clothing and Education Select the answer using the code given below:
- (a)1 and 2 only
- (b)1, 2 and 3 only
- (c)1, 2, 3 and 4
- (d)3 and 4 only
Correct — A, 1 and 2 only. Core inflation is headline consumer price inflation stripped of its two most volatile groups — food and beverages, and fuel and light. Those two are excluded because their prices swing with the monsoon, with global crude and with administered price changes, so a month-to-month movement in them says little about underlying demand pressure. What remains is roughly the miscellaneous group, housing, clothing and footwear, and pan, tobacco and intoxicants, which together make up a little under half of the consumer price index basket. Transport and communication sits inside the miscellaneous group and stays in the core measure, and clothing and education stay in as well, so statements 3 and 4 are not excluded.
- (b)1, 2 and 3 only — It also drops transport and communication. That group is part of the miscellaneous block and remains within core inflation, although some analysts additionally strip out petrol and diesel to get a core-core measure.
- (c)1, 2, 3 and 4 — Removing all four would leave almost nothing of the basket. Clothing and education are stable service and manufactured-goods items and are exactly what a core measure is meant to keep.
- (d)3 and 4 only — It excludes the two stable groups and keeps the two volatile ones, which inverts the whole idea. Food and fuel are the components a core measure exists to remove.
The consumer price index for the combined rural and urban population is India's headline inflation measure and the target variable for monetary policy, which is set at four per cent with a band of two percentage points either side. Food and beverages carry a weight of about forty-six per cent in that index and fuel and light about seven per cent, so more than half the basket is volatile. Core inflation removes both, leaving a series that responds more to demand than to weather or to crude oil.
The reasoning behind the exclusion is worth carrying, because it also decides the borderline cases. A central bank wants a measure that tracks the pressure it can actually act on, and a monsoon failure or an OPEC decision is not that. Education and clothing prices move slowly and reflect wage and demand conditions, so they belong in the core. Transport and communication is the one candidates hesitate over, since fuel feeds into it; the convention is that it stays, and analysts who want it out compute a further core-core measure.
- Core inflation is headline consumer price inflation excluding food and beverages, and fuel and light.
- Food and beverages carry about 46 per cent weight in the combined consumer price index; fuel and light about 7 per cent.
- The Reserve Bank of India's inflation target is 4 per cent with a tolerance band of plus or minus 2 percentage points, on headline consumer price inflation.
- Transport and communication forms part of the miscellaneous group and remains in the core measure.
- Core inflation is used to read underlying demand pressure rather than supply shocks.
Only the two volatile groups come out; everything else stays.
- Assuming transport is excluded because it uses fuel; the fuel and light group is a separate category.
- Treating core inflation as the policy target; the target in India is headline consumer price inflation.
- Applying wholesale price index weights to a consumer price index question.
A select-the-exclusions item where the correct pair is small and the distractors work by over-excluding.
Consider the following statements: 1. The weight of food items is higher in the Consumer Price Index (CPI) than in the Wholesale Price Index (WPI). 2. WPI does not capture changes in the prices of services, whereas CPI does. 3. The Reserve Bank of India has adopted WPI for its primary measure of inflation and for deciding key policy rates. Which of the statements given above is/are correct?
- (a) 1 and 2 only
- (b) 2 only
- (c) 3 only
- (d) 1, 2 and 3
Answer(a) 1 and 2 only
The weights that make this exclusion necessary. Food carries a far larger weight in the consumer price index than in the wholesale index, which is why removing it changes the reading so much.
Which of the following goods are included to estimate food inflation in India? 1. Wheat 2. Paddy 3. Tobacco 4. Sugar Select the correct answer using the code given below:
- (a) 1, 2 and 3
- (b) 2, 3 and 4
- (c) 1, 3 and 4
- (d) 1, 2 and 4
Answer(d) 1, 2 and 4
The other half of the same split. That item asks what counts as food in the index; this one asks what is left once food and fuel are taken out.
- practice — not a real PYQ
The Reserve Bank of India's inflation target under the flexible inflation targeting framework is defined in terms of
- (a)Wholesale price index inflation
- (b)Core consumer price inflation
- (c)Headline consumer price index inflation, combined
- (d)The gross domestic product deflator
Answer(c) Headline consumer price index inflation, combined — 4 per cent with a band of 2 percentage points either side.
- practice — not a real PYQ
Which group carries the largest weight in India's combined consumer price index?
- (a)Housing
- (b)Fuel and light
- (c)Food and beverages
- (d)Clothing and footwear
Answer(c) Food and beverages — about 46 per cent, which is why it is the first group a core measure removes.