Taking the sheen off core inflation

After a long time, there is good news on the inflation front.

Headline inflation based on the Consumer Price Index (CPI) fell to 2.8% in May after hitting a high of 7.4% in April 2023.

A decline in food inflation is pulling down headline retail inflation, but core inflation (headline excluding food and fuel) is edging up. Although remaining below the decadal trend, it has come in above 4% for four months in a row.

A persistent rise in core inflation can put pressure on headline inflation.

Typically, rising core inflation is indicative of strengthening domestic demand (and the resulting price pressure) in the economy.

But a deep dive into core inflation suggests that most of its recent rise is tied to global economic volatility rather than domestic factors.