## How to calculate India’s core inflation

Tracking Core inflation in India has become the buzzword but very few know how to really calculate it. In developed world,  core and headline inflation are given by the stats agency. Here we only get headline number and need to compute core inflation from the overall number.

Quite a few people have asked me on this calculation and hence writing this post. Though I had written an earlier post on the topic, I think it was not clear.

Though there can be many measures for core inflation, RBI has preferred non-food manufacturing products inflation as the core  inflation.  This paper  evaluated various measures which could be used as core and finds this non-food manufacturing products inflation gives best results.  I am not going into benefits and disadvantages of core inflation as have written enough on it.

This post is about calculation.  Some background first.

• Economic Advisor to Comemrce Ministry releases WPI Inflation data (Don’t ask me why!!)
• WPI data is divided into three broad groups. All three add to 100 with weights given in brackets:
• Primary Articles (20.12 )
• Fuel Group (14.91 )
• Manufactured Products (64.97)
• Each of these three is further divided into sub-sectors and finally into products. This office collects data from various products from various agencies which then feeds into the overall index.
• Now in Manufactured Products we have 12 sub-sectors like Food Products, Chemicals, Textiles, Leather products, Rubber  products etc.
• From this Manufactured Products, we need to remove food products inflation to get the core inflation.
• Headline comprises all the items and core removes food and fuel. As food items  (which is in primary article) and fuel are already seperate sub-sectors, all we need to do is take Manufactured Products and remove Manufactured Food Products from it.

Now, how to do this?  Here are the steps:

• Go to eaindsutry.nic.in and click on download data (4th link on the left bar) and click on 2004-05 Series
• This opens an excel file which lists all the products and sub-products which go into WPI inflation. Along with the list it gives weights and monthly index values for each file. The data starts from Apr-04 onwards
• From this search for 2 index series – Manufactured Products and Food Products (both next to each other).
• Take the data for both the series since Apr-04. The first few values look like these:

 Manufactured Products Food Products Weight 64.97 9.97 Apr-04 98.6 98.2 May-04 99 99.1 Jun-04 98.9 98.9 Jul-04 99.4 99.5 Aug-04 100 100.9 Sep-04 100.1 101.5 Oct-04 100.3 100.6 Nov-04 100.3 100.2 Dec-04 100.4 100.1

• Now what we do is multiply the weight of the index with the value of the index.

 Manufactured Products Food Products Weight 64.97 9.97 Apr-04 98.6*(64.97/100) 98.2 * (9.97/100) May-04 99 * (64.97/100) 99.1 * (9.97/100)

•  We would now get weighted values of the two items. We subtract Food Products weighted index from Mfd. Products weighted Index. It leads to Core Inflation Index. This is nothing but non-food manufacturing products inflation as we have removed manufactured food products inflation from manufactured inflation

 Manufactured Products (A) Food Products (B) Core Index (A-B) Weight 64.97 9.97 55.0 Apr-04 64.1 9.8 54.3 May-04 64.3 9.9 54.4 Jun-04 64.3 9.9 54.4 Jul-04 64.6 9.9 54.7 Aug-04 65.0 10.1 54.9 Sep-04 65.0 10.1 54.9 Oct-04 65.2 10.0 55.1 Nov-04 65.2 10.0 55.2 Dec-04 65.2 10.0 55.2

• From this core index, we can now calculate core inflation easily. As we have index data from Apr-04 onwards, we can calculate inflation from Apr-05 onwards (called Year on Year inflation). I am just showing the data till Dec-05. We can calculate core inflation till Dec-11 as of now. Around 15th of every month the WPI data is released for previous month. So just update the tables from eaindustry…
 Core Index Core Inflation Apr-04 54.3 May-04 54.4 Jun-04 54.4 Jul-04 54.7 Aug-04 54.9 Sep-04 54.9 Oct-04 55.1 Nov-04 55.2 Dec-04 55.2 Jan-05 55.4 Feb-05 55.6 Mar-05 55.8 Apr-05 56.8 4.7 May-05 56.5 3.9 Jun-05 56.3 3.6 Jul-05 56.2 2.8 Aug-05 56.2 2.3 Sep-05 56.2 2.4 Oct-05 56.2 2.0 Nov-05 56.3 2.1 Dec-05 56.3 1.9

Hope this short note helped. In case of any problems let me know..

### 15 Responses to “How to calculate India’s core inflation”

1. Amar Ranu Says:

perfect explaination…appreciate it…

How to calculate core inflation from core index

• Amol Agrawal Says:

I have explained that in the post. For instance when you are calculating core inflation for Jan-12, we subtract core index Jan-12 from Core index Jan-11 and calculate the %.. That becomes core inflation..

3. shivkumar Says:

Hi Amol,
Thanks for the excellent explanation. I still have a doubt. We have three measures of inflation, The WPI ( producer prices), consumer price index and the GDP deflator. All these three measures show wide variances. The core inflation is 2-3 per cent lower than the deflator, The difference between the deflator and the consumer price is again 3 per cent. So what impacts monetary policy transmission? Is it the core inflation, the deflator or CPI? The question is because bond markets appear to factor in the WPI in view off a low credit to GDP ratio of just 55 per cent. Thanks and regards. Shivkumar

• Amol Agrawal Says:

Hi Shiv..Thanks for the nice comments..

The main indicator for RBI is headline WPI inflation. Though it also sees CPI, Core WPI, deflator etc to understand the trends from different lenses…Like in anything even inflation measurement and management is complex and complicated in India..

4. Swapnil Mayekar Says:

Thanks for the excellent explanation

5. What is the difference between core inflation and headline inflation? Says:

[…] In India, the measure for core inflation is WPI excluding primary articles, fuel groups and food items, and this index is called NFMI (Non Food Manufacturing Index). The NFMI consists of components that are 55% of the weight of the WPI and this link does a great job of explaining how to calculate the Non Food Manufacturing Index or India’ Core Inflation measure. […]

6. Deepak Jain Says:

Fab one !

7. Anupam Manur Says:

My word, this is an uncanny coincidence. I had some issues with trying to calculate core WPI and your blog comes up first in Google! I could have just asked you directly. Nonetheless, this is a brilliant explanation and it did help me. SO thanks a lot mate.

8. Akshaya Kumar Jena Says:

Inflation,in the above context, is obviously a rate like interest rate. But the absolute amount of interest is also there. Is inflation also an absolute amount?If so, should we not use the phrase rate of inflation to refer to the rate sense?

• Amol Agrawal Says:

yes, it should be called rate of inflation than just inflation..but somehow we just call it inflation.

and then it should further be called rate of price inflation as inflation is generic and could stand for anything..

9. Naveed Ahamd Says:

sir i have two quires one, the above as you have wrote core inflation i want to know how you have calculated it and second if we have data on two base years then how can we calculate the core inflation with the whole data on same base year.

10. Priyanka Sahu Says:

hello sir,

I need to calculate the core inflation through the method of CPI trim. can you please get me the methodology of calculation core inflation with the trimmed mean approach. Is there weight assigns to cpi data?

11. rajib sarkar Says:

Helo Sir,

Can you help me to calculate core CPI inflation from 2001 onward?
If i follow the same methodology as stated for computation of core WPI, then from where i will get the CPI data with weights?

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