Consider the following differences between core and headline inflation 1 While core inflation exclud...........

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Consider the following differences between core and headline inflation:

1. While core inflation excludes food and fuel prices, headline inflation includes them.

2. Core inflation is relatively more volatile and fluctuating than headline inflation.

Which of the statements given above is/are correct?

1 only

2 only

Both 1 and 2

Neither 1 nor 2

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Explanation:

Statement 1 is correct- Core Inflation, also known as underlying inflation, is a measure of inflation which excludes items that face volatile price movement, notably food and energy. It is nothing but Headline Inflation minus inflation that is contributed by food and energy commodities.
Statement 2 is not correct- Unlike core inflation, headline inflation also takes into account changes in the price of food and energy. Since food and energy prices are highly volatile, headline inflation fluctuates more and may not give an accurate picture of how an economy is behaving. Whenever core inflation rises, RBI increases policy rates to suck excess liquidity from the market and vice versa.