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When headline inflation by the Consumer Price Index (CPI) printed on 12 April 2022 at 6.95% year-on-year (yoy) for March, people did not need the reading to know inflation was on. Not surprisingly, an off-cycle monetary policy announcement on 4 May hiked the repo and all associated absorption and injection rates by 0.4%, along with more direct liquidity draining measures.

The price rise is largely driven by the non-core elements (subject to exogenous forces, less amenable to domestic policy) in the retail consumption basket. The standard non-core elements deducted to obtain core inflation (headline minus non-core) are food (the Consumer Food Price Index, CFPI, rose to 7.68% for March from 5.85% in February) and fuel. It is useful at all times to retain a parallel focus on core inflation. Of course, core inflation is affected by the non-core, especially fuel as a universal intermediate, along with other intermediates currently driving the core, like steel.

Today, even the food element in the non-core is being driven up both by primary global supply shortages and the rise in the fuel cost of transporting food. The key, therefore, is the cost of fuel. Indian diplomacy was credited with having achieved access to Russian crude oil in the face of sanctions, reportedly on offer at a discount of $20-30 per barrel. That held out a promise of inflation control without heavy dependence on the more indirect route of monetary contraction.

Sadly, however, it looks as though we will not reap that bonanza any time soon. A Bloomberg article authored by Serene Cheong and Debjit Chakraborty identifies the problem as the way Indian oil refineries source crude oil—by a call for tenders from trader intermediaries, few enough in number to form oligarchies which collude on prices. The deep discounts on Russian crude are reportedly being pocketed by those traders, while refineries continue to pay what might at best be a marginally discounted price.

Chinese state-owned refineries are reported to have their own trading arms, which scour the globe in search of the best deals. We in India opt for the greater amenability to vigilance of the tendering process, which can work well in stable times, but carries a huge cost at times like the present.

The oligarchic hold of intermediaries in the global market for oil is of a piece with what I discovered during past research on international trade in coffee and cocoa. Economists laud the benefits of trade, among other reasons on the presumption that competition self-regulates prices, but that is far from the reality. Global markets for primary commodities are characterized by powerful price-maker intermediaries.

In the current situation, the limited access to Russian crude exacerbates matters. However, other traders are reported to be trying to work their way around the sanctions. Eventually a larger piece of the Russian price discount may reach Indian refineries. That will take time, however.

The direct impact of fuel oil and food on headline inflation is a function of their weight in the retail consumer basket. In India, these are presently taken as the weight of the food and beverages group (FB, 45.86 %) and fuel and light (FL, 6.84 %). That leaves a core with a weight of 47.3 %. In March 2022, when headline inflation stood at 6.95%, core inflation measured that way stood at 6.37%.

But the FL group includes fuel only as used for cooking and lighting. Fuel directly bought by the consumer for conveyance (petrol, diesel) is listed in the transportation group. It should rightly have been included in the FL group, since what matters is the direct purchase of that item by the consumer regardless of the uses to which it is put. Doing that adjustment, the (revised) weight of the fuel group goes up by an additional 2.385%, and the weight of the core correspondingly goes down from 47.3% to 44.9%.

Over the 10 months from June 2021 to March 2022, uncontaminated by lockdown data issues, average monthly inflation in the FL group was 11.58 %. The average for conveyance fuel was 19.85%. And yet this is included in the core as currently measured. Inflation in the FL group is much lower because two-thirds of the weight is taken by electricity (administered prices) and firewood.

Core inflation as currently (and wrongly) measured, averaged 5.98% over that June to March period. The revised core excluding fuel in all its uses averages 5.41%. It still includes the indirect impact of fuel through transportation, which is set to go up further, as auto and taxi fares are adjusted upwards, and as costs of transporting all goods spirals their prices up further. It will also reflect the price rise in intermediates like steel, as also the impact of the Shanghai lockdown on prices of active pharmaceutical ingredients (APIs) and a whole host of other inputs in the global supply chain. Not to mention semi-conductors and fertilizer. But it gives us inflation shorn of the direct impact of food and fuel inflation, and that is what a core measure is supposed to do.

Both headline and core will benefit enormously if we manage to secure those large discounts on Russian crude.

Indira Rajaraman is an economist

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