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Inflation spreading from food to manufacturing

Inflation spreading from food to manufacturing
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First Published: Tue, Mar 09 2010. 10 06 PM IST

Updated: Tue, Mar 09 2010. 10 06 PM IST
Inflation in food articles may have moved up to 17.87% year-on-year (y-o-y) on 20 February, but the index for the food articles group has actually come down by 3.8% from the peak it reached on 28 November last year.
The index of food articles declined from 296.1 on 28 November to 285 by 20 February. Similarly, the index of primary articles, of which the food index is a part, has declined from a high of 289 on 12 December to 283.7 on 20 February, a more modest fall of 1.8%. With the winter crop expected to be better than last year, food prices could fall further.
The question is whether that will be compensated by higher fuel and manufacturing prices. If we start from the same date as we’ve taken for the index of food articles, then the fuel index is up 2.7% and will rise even more as the result of the post-Budget price hike.
Prices of manufactured products have already started to rise, with auto and steel makers passing on the hike in excise duty. That’s a clear sign that pricing power is back. Another signal of mounting inflationary pressures arises from the recent study by Hewitt Associates that Indian salaries are likely to rise on average by 10.6% this year.
Nevertheless, the y-o-y inflation rate should start falling after April and should rapidly fall from June, which is when the Wholesale Price Index really started to sprint last year.
The proviso to that scenario, admittedly a big one given the recovery in global growth, is that commodity price gains remain muted. Oil prices have already crossed $80 (Rs3,640) a barrel and reports say that iron ore prices could rise by 50%. Coking coal prices have already been revised upwards by 55%.
However, if inflation does go down in the second half of the year, and given the likely front-loading of the government’s borrowing requirement, there could be a bounce in bonds later on.
In the longer term, inflation could well be a structural problem. In India, the building of a rudimentary social safety net through the Mahatma Gandhi National Rural Employment Guarantee Scheme is putting money into the hands of the rural poor and this is pushing up both food demand and wage costs in agriculture, which in turn could lead to higher procurement prices.
Globally,?there are reports of a Chinese labour shortage in the coastal provinces, the result of the government’s push to develop the interior. In the last couple of decades, prices of manufactured goods have fallen globally as Chinese prices became world prices.
With wage costs rising in China, manufacturing prices worldwide may start to rise, unless other low-wage countries such as India are able to step into the breach.
Write to us at marktomarket@livemint.com
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First Published: Tue, Mar 09 2010. 10 06 PM IST