IMPACT OF FOOD INFLATION ON HEADLINE INFLATION IN INDIA Anuradha Patnaik* A commonly held belief in the s was that price indices rise because of temporary noise, and then revert after a short interval (Cecchetti and Moessner, 2008). Accordingly, policy should not respond to the inflation because of these volatile components of the price indices. This led to the development of the concept of core inflation (Gordon, 1975), which is headline inflation excluding food and fuel inflation. It was strongly believed that in the long run, headline inflation converges to core inflation and that there are no second round effects (that is an absence of core inflation converging to headline inflation. In recent years, however, major fluctuations in food inflation have occurred. This has become a major problem in developing countries, such as India, where a large portion of the
