Chapter 1 Core Inflation Dynamics and Impact of Demand and Supply Shocks: Evidence from India Priyanka Sahu and Naresh Kumar Sharma 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. Keywords Core inflation  Demand shock  Supply shock  ARDL bound test approach 1.1 Introduction Targeting inflation within the specific range has become the major objective of the monetary policy. Recently, there are two majors development in the macroeco- nomics management in India. First, announcement of a new monetary policy committee for the task of deciding the benchmark policy rates to target inflation at a specific level. Next, formal declaration of inflation targeting as a new monetary policy objective, where Consumer Price Index (CPI) acts a nominal anchor to target inflation at the rate 4% with a band of 2–6%. P. Sahu (&)  N. K. Sharma School of Economics, University of Hyderabad, Hyderabad, India e-mail: priyanka.7mar@gmail.com © Springer Nature Switzerland AG 2018 A. K. Mishra et al. (eds.), Current Issues in the Economy and Finance of India, Springer Proceedings in Business and Economics, https://doi.org/10.1007/978-3-319-99555-7_1 3