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

Yogeshwar Bharat (), Rajeswari Sengupta () and Gautham Udupa ()
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Yogeshwar Bharat: Shiv Nadar University
Rajeswari Sengupta: Indira Gandhi Institute of Development Research
Gautham Udupa: Centre For Advanced Financial Research And Learning

Indira Gandhi Institute of Development Research, Mumbai Working Papers from Indira Gandhi Institute of Development Research, Mumbai, India

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.

Keywords: Inflation forecasting; Core inflation; Headline inflation; State-level inflation (search for similar items in EconPapers)
JEL-codes: E31 E37 E52 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2025-08
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Persistent link: https://EconPapers.repec.org/RePEc:ind:igiwpp:2025-021

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