Fuel Inflation impacts core more than food: Report
core inflation is higher than that of food inflation and the response of core inflation to fuel price shock becomes significant and large during global uncertainties, said a research paper by RBI economists. Food inflation is better anchored since the central bank moved to flexible inflation targeting as its policy goal, the paper said.
The paper assessed the degree and duration of the potential second-round effects of food and fuel price shocks on headline inflation. " Our analysis suggests that headline inflation reverts to core inflation and not vice versa. While there has been a decline in the volatility of fuel inflation, its impact on core inflation has turned significant of late" said Harendra Kumar Behera and Abhishek Ranjan from the Reserve Bank's department of Economic and Policy Research. The views are however those of the authors.
The article tried to estimate the impact of food and fuel inflation shocks on core inflation to assess second-round effects as it helps to assess whether monetary policy should react to temporary supply shocks. The response of core inflation to food inflation shock is found to be the highest during the 2nd to 3rd quarter and starts dampening thereafter.
The impact of food inflation shock on core inflation was the maximum during the late 1990s, which has declined over time, the paper finds. The response of core inflation to a one per cent rise in food inflation has declined from 0.37 percentage points in the second quarter of 1998-99 to 0.14 percentage points in the third
