Inflation measured by the Wholesale Price Index (WPI) may have come down to a 30-year low on a year-on-year (y-o-y) basis, but the y-o-y picture sometimes conceals a lot of things. For instance, in the three months to end-May, WPI has gone up 2.1%. The primary articles index has risen by 4.2% over the same period, with food rising 4.7%.
The fuel index has been flat, despite the big increase in global crude oil prices. And the manufactured products index has risen 2% between 28 February and 30 May. To be sure, during the same period last year, i.e., between end-February and end-May 2008, WPI had gone up by as much as 5.1%. But if the global economy continues to improve, there’s bound to be upward pressure on prices, especially if fuel prices are either decontrolled or hiked.
And then there’s the base effect. WPI started to fall from September last year, which means that, on the basis of arithmetic alone, the rate of inflation is likely to pick up this year. In fact, you don’t really have to factor in any increase in global commodity prices at all for inflation to pick up. Robert Prior-Wandesforde, economist at HSBC, points out, “On the basis of unchanged commodity prices and a stable dollar-rupee exchange rate, the y-o-y rate of oil price inflation will be 66% in December, food 24% and base metals 45%.”
He adds, “By the end of this calendar year, we could be looking at energy price inflation of about 15%, primary at 4% and manufacturing up 4%... This works out to be a 5½% headline rate of inflation... We think WPI inflation could reach 7-8% by the end of fiscal 2009-10—double Reserve Bank of India’s (RBI) 4% target and up from our previous 1.8% forecast.”
Much depends, though, on whether the current surge in commodity prices is sustainable. Most of the rise is due not so much to an economic revival but to liquidity and the fall of the dollar.
As for RBI, ICICI Securities Ltd economist A. Prasanna points out that if reports of interest rates on small savings being forced down are true, then RBI’s stance on softer interest rates should continue, as it doesn’t make sense to bring down those rates if interest rates are on their way up.
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