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Informist, Wednesday, Jun. 18, 2025

 

NEW DELHI - Gold should be excluded from the calculation of core CPI inflation to more accurately gauge the impact of domestic demand on prices, Crisil said in a report released Wednesday. This is particularly the case when global economic uncertainty is high and a spike in gold prices can skew the core inflation trajectory, the report said.

 

"A persistent rise in core inflation can put pressure on headline inflation," Crisil said. "Typically, rising core inflation is indicative of strengthening domestic demand (and the resulting price pressure) 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."

 

Government data released last week showed that CPI inflation fell to an over six-year low of 2.82% in May, driven by a decline in food inflation. However, core CPI inflation, which excludes the volatile food and fuel categories, climbed to a 19-month high of 4.2% in May. Core inflation has risen around 100 basis points over the last 10 months from a low of 3.1% in June, 2024, mainly because of higher gold prices, and hike in mobile tariffs.

 

According to Crisil, if gold prices had followed their usual trend, core inflation would have been 3.4% in May instead of the reported 4.2%. "Keeping out gold shows that the core CPI rose only 65 basis points over the 12 months ending May 2025 as against the 111 bps increase in the commonly used core measure," the report said.

 

Crisil noted that including gold in the core CPI calculation distorts domestic price signals, despite its relatively small weight of 1.1% in the headline CPI. Since gold prices are primarily driven by global factors, particularly safe-haven investment demand, a price rise may not accurately reflect domestic consumption trends, the report stated.

 

Crisil said global investment demand and high inflation volatility in gold are two reasons that justify the exclusion of the precious metal from the core index during global uncertainty.

 

"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," Crisil said, adding that a higher weight for gold in India is likely because its higher share in consumption. Gold, despite a lighter weight than other items in the core inflation index, contributed 17% of the rise in core inflation over the 12 months ended May 2025, the report said.  End

 

Reported by Shubham Rana

Edited by Subhojit Sarkar

 

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