Question

Which of the following is excluded from headline inflation to arrive at core inflation?

• A. Energy prices
• B. Gold prices
• C. Automobile prices
• D. Share prices

Hint:

Core inflation provides a more stable measure of inflation by excluding volatile items like energy prices, which can fluctuate greatly and distort the overall inflation picture.

Answer 1

The Correct Option is A

Topic: Measurement of Inflation
Understanding the Question: We need to identify which component is removed from the Headline Inflation index (total inflation) to calculate Core Inflation.
Key Formulas and Approach: \[ \text{Core Inflation} = \text{Headline Inflation} - (\text{Food prices} + \text{Fuel/Energy prices}) \] The logic is to remove "volatile" items that experience frequent, temporary price shocks.
Detailed Solution:
Step 1: Define Headline Inflation. Headline inflation measures the total inflation within an economy, including commodities such as food and energy.
Step 2: Define Core Inflation. Core inflation is used by central banks to see the long-term trend. It excludes items with high price volatility.
Step 3: Identify volatile components. Food and Energy (Fuel) are the most volatile components. Their prices often change due to weather or geopolitical events rather than general economic demand.
Step 4: Match with options. Among the choices, Energy prices are standard exclusions for core inflation. Share prices are not part of the Consumer Price Index (CPI) basket at all.
Conclusion: Energy prices (A) are excluded to calculate core inflation.