3. Since the prices of fuel and food items tend to fluctuate and create ‘noise’ in inflation computation, core inflation is less volatile than headline inflation.

Core inflation is commonly defined as a measure of inflation that omits changes in food and energy prices. Some policymakers prefer to use core inflation to predict future overall inflation because food and energy price volatility makes it difficult to discern trends from the overall inflation rate.

Thus, while headline inflation is calculated as the year‐on‐year change in the overall CPI compiled by the PSA, the official core inflation measure is defined as the rate of change of headline CPI after excluding selected food and energy items.

Headline inflation is the total inflation in an economy. It is different from core inflation, which excludes food and energy prices while calculating inflation. Food and energy are not included in core inflation because their prices are volatile. It makes headline inflation a more volatile measure than core inflation.

Core inflation removes the CPI components that can exhibit large amounts of volatility from month to month, which can cause unwanted distortion to the headline figure. The most commonly removed factors are those relating to the cost of food and energy.

Which measure of inflation best reflects underlying trends in the economy? rise in prices in the economy.

The “best” measure of inflation depends on the intended use of the data. The CPI is generally the best measure for adjusting payments to consumers when the intent is to allow consumers to purchase at today’s prices, a market basket of goods and services equivalent to one that they could purchase in an earlier period.

Inflation can be measured by two methods, namely, by determining changes in Price Index Numbers (PINs) and by comparing changes in Gross National Product (GNP) deflator. Let us discuss these two methods indetailed below.