Abstract: The existing researches on core inflation mainly focus on extending the estimation methods, thus gradually deviating from the original intention of the concept. Actually, the primary purpose of creating core inflation is to eliminate headline inflation bias and help the public to perceive the real inflation. Therefore, this paper employs a dynamic factor model to estimate China's core inflation, and then utilizes a distributed lag model of CPI to fit the core inflation reversely. The main conclusions are as follows: first, previous inflation and deflation are mainly induced by departmental price changes, which makes an overreaction on CPI and causes price illusion; second, the distributed lag model of CPI can fit core inflation well, showing that the empirical equation is able to correct public expectation effectively; and lastly, due to the recent price fluctuations in food sector, the CPI bias has reemerged. As a result, the monetary authorities should pay more attention to their expectation management and inflation targeting. 

Keywords: Core Inflation; CPI Bias; Inflation Illusion; Revision of Inflation Expectation.