Inflation slides to under 5% from 9% in 10 years: Find out how

In FY14, the headline inflation in the country stood at 9.4%. In a matter of 10 years, the headline inflation has dropped to 5.5% in FY24, according to data provided by the Ministry of Finance.

During the Monetary Policy Committee (MPC) meeting of the RBI during June 5-7, it said that the headline inflation was projected to ease from 5.4% in 2023-24 to 4.5% in 2024-25. This was subject to evenly balanced risks from the rising incidence of adverse climate events, pressures from input costs and volatility in crude prices and financial markers as well as the effects of monsoon on food prices.

Headline inflation is the measure of the total inflation within an economy, encompassing the overall rise in prices of goods and services included in a specific basket. This basket typically comprises a range of essential consumer goods and services, such as food, housing, transportation, medical care, and education. In India, headline inflation is often measured using indices like the Consumer Price Index (CPI) and the Wholesale Price Index (WPI).

The CPI measures the average change over time in prices paid by consumers for a basket of goods and services. It is designed to reflect the spending patterns of households and includes items such as food, housing, clothing, transportation, healthcare, and education.

CPI calculations are based on a fixed basket of goods and services that represent what a typical consumer buys. This index is crucial for assessing changes in the cost of living for urban and rural populations.

Governments and central banks use CPI data to make decisions on monetary policy, including interest rates adjustments, and to ensure economic stability by monitoring inflation rates that directly impact consumers’ purchasing power.

In contrast, the WPI measures the average change in prices of goods traded in bulk at the wholesale level before they reach the retail market. It includes commodities like raw materials, fuel, chemicals, metals, and food products. The WPI primarily reflects price movements in the early stages of production and distribution.

Businesses and policymakers use the WPI to analyze trends in production costs and input prices. Unlike the CPI, the WPI excludes services and consumer goods directly purchased by individuals, focusing instead on goods traded between businesses. It provides insights into cost pressures faced by producers and helps forecast future changes in consumer prices.

Here’s a timeline of headline inflation from FY14 to FY24

Difference between Headline Inflation and Core Inflation

With headline inflation, one also needs to understand core inflation.

Core inflation differs from headline inflation in that it excludes certain volatile items that can experience sudden price changes, such as food and energy. The purpose of core inflation is to reveal the underlying trend in inflation by focusing on goods and services whose prices tend to be more stable over time. By excluding volatile components, core inflation aims to provide a clearer picture of persistent inflationary pressures in the economy.

Example of Core Inflation
Suppose headline inflation is reported at 5%, but core inflation is only 3%. This difference indicates that the price increases driving headline inflation are primarily due to temporary factors such as food and energy price fluctuations, while prices in other sectors are more stable.

Difference between Headline Inflation and Underlying Inflation

While headline inflation encompasses all goods and services in the CPI or WPI basket, including volatile items, underlying inflation refers to inflationary pressures once volatile or temporary factors are excluded. Underlying inflation provides a more refined view of inflation trends by focusing on stable price movements in essential goods and services unaffected by temporary factors.

If headline inflation spikes due to a sudden increase in food prices caused by adverse weather conditions, underlying inflation would exclude this temporary spike to reveal the inflationary trend in other sectors like housing, education, and healthcare.