NO : WP-2025-021
AUTHOR : Yogeshwar Bharat (SNU), Rajeswari Sengupta (IGIDR), Gautham Udupa (CAFRAL)
TITLE : Is core inflation useful in predicting headline inflation? Evidence from a large, emerging economy
ABSTRACT :
Core inflation measure is widely tracked as a measure of trend inflation, but it does not forecast headline inflation well. In this paper, we use disaggregated state-level inflation data from India to construct a ‘cleaned’ core inflation mea-sure. We do this by stripping out the passthrough of past food inflation from the raw core inflation measure. We estimate the passthrough using local projection with global supply-side instruments in order to achieve better identification. We further find that our ‘cleaned’ core inflation measure generates better forecasts of the headline inflation after a six-month horizon, compared to the raw core measure.
Keywords: Inflation forecasting, Core inflation, Headline inflation, State-level in- flation
JEL Code: E31, E37, E52.
Weblink: http://www.igidr.ac.in/pdf/publication/WP-2025-021.pdf
