Core Inflation Dynamics and Impact of Demand and Supply Shocks: Evidence from India

Abstract

This paper attempts to investigate the impact of demand and supply side factors on core inflation in India. First, we empirically calculate core inflation through conventional exclusion based measure (excluding food, excluding energy and excluding both food and energy) as well as statistical measure (asymmetric trimmed mean approach). Next, we empirically try to observe the association of core inflation with macroeconomic variables through autoregressive-distributed lag model (ARDL) and bound test approach. Empirical findings based on ARDL bound test approach confirms the existence of short run and long run association of core inflation with macroeconomic variables. Overall, the response of core inflation to demand-side factors is high in case of real variables as compared to monetary variables and its response to skewness-based supply-side factor is high as compared to food and fuel inflation.