A study on exclusion based measure of core inflation for India.

This paper seeks to obtain a new exclusion based inflation measure for India based on CPI components with 90 percent of the weight in the headline inflation, performing better than the existing exclusion based inflation measures. The core inflation computed through conventional exclusion based measure, i.e. excluding food, excluding energy and excluding food and energy perform worse in tracking the underlying trend of headline inflation. The core inflation computed excluding food, excluding food and energy represents components with less than 60 percent of the weight in headline CPI which is less compared to the 80 percent average of most countries. The core inflation computed excluding energy fails to remove volatility part of the headline CPI. Nonetheless, exclusion based measures are simple and transparent. This study aims to find optimal core inflation excluding food commodities that represent less than 10 percent of the weight in headline CPI. This study uses 88 monthly price indices which are constituent components of the Consumer Price Index from the period January 2012 to April 2019, with 2011–2012 as the base year. Several estimators based on exclusion based approach are considered and tested by various volatility conditions. The study results in an exclusion based inflation measure performing considerably better than the conventional excluding measure in removing volatility and tracking the trend of headline inflation. [ABSTRACT FROM AUTHOR]