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For the past one and a half years, the Indian economy has been roiled by the spectre of inflation.
Inflation, in particular, has been exacerbated by a supply chain crisis and the bursting of pent-up demand. This sudden burst in pent-up demand has sent energy, food, non-food commodities, and input prices spiralling across the globe – egged on by disruption of global supply chains, and rising freight costs, not just in India but across the world.
The Economic Survey attributes the rise in retail inflation in India to the forbidding levels of over 6% in FY21 to the usual suspects of supply chain issues, lockdowns and other COVID-19 restrictions. It also goes a little deeper into the dynamics of the calculation of inflation in India. Traditionally, “core inflation” is calculated by excluding ‘food and beverages’ and ‘fuel and light’ groups from overall inflation.
“While in CPI-C (Consumer Price Index-Combined), major fuel items such as ‘petrol for vehicle’ and ‘diesel for vehicle’, which have relatively large weights, are not included in ‘fuel and light’. These fuel items are included in ‘transport and communication’, a subgroup under the miscellaneous group. Therefore, the conventional way of calculating retail core inflation, instead of excluding the volatile fuel items from core inflation, continue to include volatile fuel items in core inflation. As a result, the fuel price rise continues to impact core inflation.” the survey explains.
The survey constructs a new term – ‘refined’ core inflation, which excludes main fuel items like ‘petrol for vehicle’, ‘diesel for vehicle’ and ‘lubricants’ and other fuels for vehicles, in addition to ‘food and beverages’ and ‘fuel and light’ from the headline retail inflation.
Refined core inflation is much below core inflation which shows that the impact of fuel in conventional core inflation is quite substantial.
In 2020-21 (April-December) it was ‘food and beverage’ that drove inflation, whereas during 2021-22 (April to December) the major drivers of retail inflation have been miscellaneous and the ‘fuel and light’ group. The contribution of the miscellaneous group has increased from 26.8% in 2020-21 (April-December) to 35% in 2021-22 (April-December) and the contribution of ‘fuel and light’ increased from 2.3% to 14.9%. On the other hand, during the same period, the contribution of ‘food and beverages’ declined from 59% to 31.9%.
Within the ‘miscellaneous group’, the sub-group ‘transport and communication’ contributed the most, followed by health.
During 2021-22 (April-December), the ‘miscellaneous’ group, by accounting for around 35% of overall inflation has been an important driver of retail inflation. Within this group, high inflation in the sub-group ‘transport and communication’ – driven mainly by inflation in petrol and diesel for vehicles – has been contributing significantly.
A series of unprecedented cuts in crude oil supply by OPEC and other oil-producing countries led to an upward trend in high international crude oil and petroleum product prices, which consequently led to a spike in inflation in the ‘fuel and light’ and ‘transport and communication’ groups.
These fuel items are included in ‘transport and communication’, a sub-group under the miscellaneous group. Therefore, the conventional way of calculating retail core inflation, instead of excluding the volatile fuel items from core inflation, continue to include volatile fuel items in core inflation. As a result, the fuel price rise continues to impact core inflation.