What is Headline Inflation?
Headline inflation is a term used for consolidated inflation figures within the economy and it usually includes commodities like energy (including oil and gas prices), food, and beverages. Examples of products considered under headline inflation are food grains, vegetables, pulses, fruits, petroleum, fuel, butter, salt, spices and condiments, dairy products, kerosene, diesel, tools, jigs, equipment, accessories, cosmetics, etc. Hence it is taken into consideration the price of the basket of all the above products in a particular month in comparison to the price of all these products in the same month in the previous year.
Features of Headline Inflation
- It considers prices of various wholesale products which are usually daily used by households and for other commercial purposes. It can be said that headline inflation plays a very important role in measuring the price changes in those commodities which are used by the general public.
- Given to retail price hold more importance then wholesale prices but wholesale market are much more prone to changes in the price and hence inflation rate on those wholesale products gains higher importance in day to day life.
- Deflation affects the economy on a very higher scale. Considering wholesale price inflation it is usually seen that the wholesale market price tends to increase your own business and there are very little chances of it getting decreased. Hence it can be said that changes in the price of wholesale products always lead to inflation rather than deflation.
- Headline inflation takes into consideration the prices of food and energy which is omitted in the core inflation rate.
- Many economics have a view that online core inflation, headline inflation has proven its success in terms of a good forecast of future prices. Hence it is a rational measure of inflation.
- This measure is more useful for households since it takes into consideration changes in the cost of living of an individual.
- Headline inflation shows the effect of demand and supply on GDP (Gross Domestic product).
Limitations of Headline Inflation
Though headline inflation is useful in the above-mentioned ways, there are certain disadvantages also. The various disadvantages related to headline inflation are as follows:
- This measure is based upon wholesale prices in the country, however wholesale prices have lost its relevance after the government changed its frequency of review to a monthly basis.
- A sudden and rapid increase in the prices of vegetables and other food items and prices of oil and gasses makes the headline inflation rate boost up in a very short span. Hence, this inflation rate may cause havoc in the minds of the people referring to such an inflation rate.
- Central banks normally use core inflation as a measure of inflation and not headline inflation rate since the headline inflation measure is much more volatile.
- It is not a good indicator and a predictor over a short period since food and energy prices are highly volatile as compared to other products in the economy.
The different important points related to the headline inflation are as follows:
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- It should be noted that out of all countries, almost 24 to 25 countries using wholesale price inflation index while rest of the countries use consumer price index related inflation rate the countries using the wholesale price index for measuring the inflation rate does not cover even half of the total countries of the world as per International Monetary Fund IMF statistics.
- This is measured in various countries on your basis that is, change in the wholesale price of various products and services of a particular month is measured in correspondence to the same month in the preceding year.
- This is measured in the month of March and the price change in the wholesale market of the particular product is compared with the prices in the month of March in the preceding financial year.
- Bank of England and the European Central Bank are currently using this headline inflation to measure the price changes in the economy. The United States does not focus much on headline inflation rather it uses the court inflation rate to measure the changes in the economy.
- The core inflation rate is another rate used by countries to measure the inflation which is based mostly on the retail prices of Asus goods and services excluding prices of food and oil as stated above and hence in various industries core inflation rate gold much higher importance as compared with headline inflation.
- The Federal Open Market Committee (FOMC) of the United States Emphasis more on long-run headline inflation.
- From the above discussion, two things are very clear that there can be a different point of view of different people and countries on both headline inflation and core inflation. Both the measure of inflation has its own pros and cons for different industries and different professions. This has been accepted by some countries while core inflation has been accepted by other countries.
- Both measures have used in different fields. However when it comes time measure of changes in the price index of prices of wholesale goods and services headline index plays a very important role in providing a figure of changes as compared to two corresponding months in the preceding year.
- While considering the above advantages and disadvantages along with examples stated it can be said that headline has been used in a reducing number after various government policies of focusing on retail prices rather than wholesale prices for considering the changes in the whole economy and hence headline inflation rate has been decreasing the use in various countries including the United States of America.
This has been a guide to What is Headline Inflation & its meaning. Here we discuss the example of headline inflation along with advantages and disadvantages. You can learn more about from the following articles –