We may have been too quick to celebrate a decline in headline inflation, if a report by leading ratings agency CRISIL Limited is anything to go by.
While the fall in headline inflation based on the CPI to 2.8 per cent in May, 2025, is a good omen for Indian economy, core inflation (excluding food and fuel) is edging up.
Although remaining below the decadal trend, the core inflation has been now above four per cent for four months in a row. CRISIL said a persistent rise in core inflation can put pressure on headline inflation.
Rising core inflation, says the agency, is indicative of strengthening domestic demand 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,” said the agency.
CRISIL said gold prices react to global and not domestic signals. “Although gold carries a small weight in the headline CPI (1.1 per cent of the total index), inclusion of it in the core CPI inflation distorts domestic price signals.”
Gold carries a higher weight in India’s core inflation index than it does elsewhere. Other prominent central banks also include gold in their core inflation index, but its weight is significantly lower than in India, limiting its impact on their core inflation measure.
In India, a higher weight for gold is possibly due to its higher share in consumption compared to other countries. Keeping out gold prevents misinterpretations of core CPI signals, CRISIL said in the report.
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