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Is core inflation useful in predicting headline inflation? Evidence from a large, emerging economy

Author

Listed:
  • Yogeshwar Bharat

    (Shiv Nadar University)

  • Rajeswari Sengupta

    (Indira Gandhi Institute of Development Research)

  • Gautham Udupa

    (Centre For Advanced Financial Research And Learning)

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 measure. 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.

Suggested Citation

  • Yogeshwar Bharat & Rajeswari Sengupta & Gautham Udupa, 2025. "Is core inflation useful in predicting headline inflation? Evidence from a large, emerging economy," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2025-021, Indira Gandhi Institute of Development Research, Mumbai, India.
    • Handle: RePEc:ind:igiwpp:2025-021
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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