What is Core Inflation? How It Differs from Headline Inflation

Core inflation shows how much prices are rising, but it leaves out food and energy because their prices change a lot. It helps people and central banks see the real trend of inflation without short-term ups and downs.

How It Affects People Like Renuka?

Renuka lives in Delhi and works full-time. In June, she sees prices at the supermarket and petrol pump go up. Headline inflation that month is 5%, but core inflation, which leaves out food and fuel, is just 3.5%.

This difference matters. Renuka’s daily food costs change quickly, but her rent, insurance, and school fees go up more slowly. If core inflation stays high, the Reserve Bank of India might raise interest rates. That would make her loans more expensive.

So, even though food and fuel prices grab attention, core inflation affects her salary, savings, and monthly budget in the long run. In this blog, you will learn about core inflation and its difference from headline inflation.

What Is Headline Inflation?

Headline inflation shows how much the overall cost of living has gone up. It measures the rise in prices of everyday items like food, fuel, housing, transport, and other goods and services.

It includes everything people spend money on, even items like petrol and vegetables, which can change in price very quickly. The government uses something called the Consumer Price Index (CPI) to track this.

Example of Headline Inflation:

Let’s say in July 2024, the average CPI was 120.0, and in July 2025, it increased to 126.0. You can calculate headline inflation like this:

Inflation Rate = 126.0 - 120.0 /120.0 * 100 = 5.0%

This means the average cost of living has increased by 5% over the past year.

Why It Matters
 

• You feel it in daily life, when groceries, fuel, or electricity bills go up.
   
• Businesses use it to decide if they should increase wages or prices.
   
• The government and central bank watch it to help set interest rates and manage the economy.
   

Even though food and fuel prices can rise and fall quickly, headline inflation still shows the real impact on your wallet. It gives a full picture of how expensive life is getting.

Why Exclude Food and Energy?

We leave out food and energy prices from core inflation because their prices change a lot and very quickly. Things like weather, war, or seasons can make food and fuel prices jump up or down. These changes happen fast and are often outside the control of the government or central bank.

By removing food and energy, core inflation shows us the real, steady rise in prices that central banks can influence when they set interest rates.

Example:

Imagine prices over one year change like this:

• Headline inflation (all items): 6%
• Food prices rise by 10%
• Energy prices rise by 12%
• Other goods and services go up by only 3%

For simplicity, let’s assume food and energy together rise at 10% on average. If they make up half of what people buy, the headline inflation looks higher because of their big price jumps.

Headline inflation calculation:

(50% × 10%) + (50% × 3%) = 6.5%

But core inflation ignores food and energy, focusing on the rest: 3%

This shows that food and energy can make headline inflation seem higher than the steady increase in other prices.

Why This Matters
 

• Central banks use core inflation to spot lasting trends, not short-term price jumps.
   
• Headline inflation shows what we pay at shops and petrol stations right now.
   
• Core inflation helps plan for the future because it is more stable.
   

So, excluding food and energy helps us see the true inflation that affects the economy over time.

Policy Implications & Central Bank Choices

The Reserve Bank of India (RBI) mainly looks at core inflation when deciding on interest rates and other money policies. Core inflation is steady because it leaves out food and energy prices, which change a lot and quickly. This helps the RBI understand the true trend in prices and make better choices.

But the RBI’s main aim is to control headline inflation, as it shows the real increase in the cost of living that people and businesses face.

How It Affects XYZ Company?

Take XYZ Company, a manufacturing business. When headline inflation jumps to 6% because of higher food and fuel prices, XYZ’s costs for materials and transport rise too. This makes running the business more expensive.

However, since core inflation is 3.5%, which reflects slower rises in wages and rent, XYZ uses this number to plan salaries, budgets, and investments. They know that while food and fuel costs can go up or down fast, core inflation shows steady, long-term cost changes.

If the RBI raises interest rates because of core inflation, XYZ will have to pay more on loans. So, the company plans ahead to manage those costs. Meanwhile, the high headline inflation means XYZ keeps an eye on sudden price changes that affect daily work.

Key points:
 

• RBI focuses on core inflation to guide its policies because it shows steady price trends.
   
• Headline inflation shows the immediate price rises people and businesses feel.
   
• XYZ Company watches both to manage costs, wages, and borrowing well.

Real-Life Examples: How Core and Headline Inflation Diverge?
 

Let’s take Infosys, one of India’s biggest tech companies, to see how core and headline inflation affect business differently.
 

• Headline Inflation Impact on Infosys: Imagine headline inflation in India rises to 7% mainly because food and fuel prices have surged due to a bad monsoon and global oil price hikes. This rise increases the cost of living for employees. Infosys’s staff might demand higher salaries to keep up with the rising costs of groceries and transport.
   
• Core Inflation Impact on Infosys: However, core inflation (which excludes food and energy) stays steady at around 4%. This reflects slower increases in wages, office rent, and software costs,  key expenses for Infosys that change less frequently.

Example:
 

• Infosys’s current annual salary expense: ₹3,000 crore.
   
• If headline inflation is 7%, employees may ask for a 7% pay raise to keep their living standards. This would increase salary costs to:

3,000 crore × 1.07 = ₹3210 crore

But if core inflation is 4%, Infosys expects other costs (rent, software licenses) to rise by about 4%. Suppose these costs are ₹1,000 crore annually, so the new cost will be:

1,000 crore × 1.04 = 1,040 crore

Why This Matters
 

• Infosys needs to prepare for a higher salary bill due to headline inflation, affecting short-term cash flow.
   
• But it plans for a moderate rise in other operating costs based on core inflation.
   
• RBI may raise interest rates based on core inflation, which can increase Infosys’s borrowing costs if it takes loans for expansion.

Key points:
 

• Headline inflation affects employee demands and day-to-day living costs directly.
   
• Core inflation helps Infosys predict steady rises in business expenses and plan long term.
   
• Both inflation types help the company manage budgets and pricing strategies wisely.

Conclusion

Core inflation shows the steady rise in prices by removing food and fuel costs, which often change quickly. It helps central banks and businesses focus on long-term trends. Headline inflation, on the other hand, includes everything and shows what people feel in daily life. Both measures matter, but for different reasons.

FAQs
 

1. Why do we remove food and fuel from core inflation?

We remove them because their prices change often due to things like weather or global events. By leaving them out, core inflation gives a clearer view of steady price changes that central banks can control.

2. Which inflation affects my grocery and fuel bills?

Headline inflation affects your daily costs like food, cooking oil, petrol, and gas. When headline inflation goes up, your monthly spending usually increases.

3. Why do central banks care more about core inflation?

Central banks watch core inflation because it stays more stable. It helps them make better decisions about interest rates without reacting to short-term price changes.

4. How do inflation rates affect companies like Infosys or TCS?

When inflation rises, companies may need to pay higher salaries and face higher running costs. If interest rates go up, loans become costlier. So, inflation affects how companies plan salaries, pricing, and budgets.
 

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LoansJagat Team

‘Simplify Finance for Everyone.’ This is the common goal of our team, as we try to explain any topic with relatable examples. From personal to business finance, managing EMIs to becoming debt-free, we do extensive research on each and every parameter, so you don’t have to. Scroll up and have a look at what 15+ years of experience in the BFSI sector looks like.