Time to estimate core inflation

Around five weeks ago, the International Monetary Fund (IMF) released the updated version of the World Economic Outlook (WEO), which showed the global inflation at a declining trend. It projected the global headline inflation to fall to 5.8 per cent in 2024 and to 4.4 per cent in 2025 from an estimated 6.8 per cent last year. This means there will be a downward trend in inflation in the coming days, although things may change due to other factors. The IMF observed that inflation is falling 'faster than expected' in most regions, mainly due to improvements in supply-side areas and restrictive monetary policy.

Three weeks before the release of the IMF projection, the United Nations (UN), in its World Economic Situation and Prospects 2024, released during the first week of January, observed that after surging for two years, global inflation eased in 2023 but remained above the 2010-2019 average. "Global headline inflation fell from 8.1 per cent in 2022, the highest in almost three decades, to an estimated 5.7 per cent in 2023," it said. It also projected a further decline to 3.9 per cent in the current year due to an anticipated moderation of international commodity prices and the weakening of demand amid monetary tightening.

Though global inflation has been declining slowly, and the situation may improve further in the coming days, there is no reasons to be complacent. The UN report also said that annual inflation is projected to exceed 10 per cent in 2024 in about a quarter of all developing countries. Though Bangladesh is not included in the list, the UN projected the Bangladesh's inflation rate to come down to 6.80 per cent in the current year from 9.60 per cent in the last year. It is a piece of good news for the country.

Bangladesh has been struggling for the last couple of months to tame inflation with little success. The rate of headline inflation or general inflation, which usually refers to the change in the value of all goods in the consumption basket, crossed the 9.0 per cent level in March last year, and the trend continued until February this year.

It, however, does not officially calculate the core inflation, which excludes food and fuel items from headline inflation. Since the prices of fuel and food items tend to fluctuate more and create a sort of volatility in inflation computation, core inflation is considered less volatile than headline inflation. The general definition of core inflation is 'the long-run or persistent component of the measured price index that is not related with the supply side shocks.' In simple terms, the core inflation rate is the change in prices of goods and services minus that of  food and energy, or core inflation is headline inflation excluding food and energy, two of the most volatile groups in the goods basket.

Food and fuel account for around 15 to 20 per cent of the household consumption basket in a developed economy. In developing economies, it usually forms around 35 per cent to 45 per cent of the basket. So, headline inflation is considered more relevant for developing economies than for developed economies. There is nothing wrong in estimating the core inflation in developing economies. However, it alone cannot provide a better scenario for the inflationary trend in these countries.

For instance, food items account for around 45 per cent of the Consumer Price Index (CPI) used to estimate inflation. So, calculating the core inflation would require deducting 45 per cent of the weight from the index. In February last, the food inflation rate stood at 9.44 per cent, which was 9.56 per cent in January. Again, non-food inflation also dropped to 9.33 per cent last month from 9.42 per cent in January. If the food inflation is excluded and one only looks at the non-food inflation, one will get a distorted or misleading picture of inflation.

Nevertheless, central banks in many developing countries estimate the core inflation separately to analyse the inflation situation more deeply. Proponents of core inflation argue that core inflation, also known as underlying inflation, has become critical to the monetary policy strategies of central banks in developed and even some developing countries. This is because a change in total CPI or headline inflation includes short-term price changes, which is not possible or difficult to explain by monetary phenomena. So, only headline inflation may be unreliable when framing the monetary policy.

Following international practice, the Bangladesh Bank also regularly calculates core inflation to conduct monetary policy operations. Considered an internal policy matter, the central bank does not publicise core inflation data. Now, time has probably come to unveil the core inflation statistics besides the headline inflation. As the Bangladesh Bureau of Statistics (BBS) is responsible for calculating the inflation, the national agency can also estimate and unveil the core inflation.  

In the last week, the finance minister wondered how inflation could be the primary concern of people in the country as 10 million people in the country were getting food at cheaper rates through family cards. The statement downplays the persistent pressure of price hikes on a large number of people. The finance minister's statement also runs counter to the government's various efforts to keep essentials prices during Ramadan stable. Against the backdrop, looking into the core inflation may be a good way to understand how alarming the inflation is and whether it is a matter of grave concern or not. As the core inflation rate is generally lower than the headline inflation, it may also comfort the policymakers.

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