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Prices march north, again

Prices march north, again
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First Published: Sun, Dec 26 2010. 07 05 PM IST
Updated: Sun, Dec 26 2010. 07 05 PM IST
After a gentle downswing in the past month or so, inflationary headwinds are back. The expectation that a favourable monsoon would lead to a cooling of the Wholesale Price Index (WPI) to a comfort level of 6% by March 2011 now seems difficult.
For the week ended 11 December, the primary articles index rose by 1.8% (week-on-week, or w-o-w). Within this group, the prices of almost all commodities that are important from a mass consumption point of view—fruits and vegetables, fish, pulses—rose. While a w-o-w measure has its own problems, it is this and the month-on-month (m-o-m) measures that show the unabated momentum of inflation.
For example, after seasonal adjustments, the WPI rose by 0.8% (m-o-m) in November, making the inflation rate close to 10%. That the WPI momentum (m-o-m and w-o-w) is unchecked is also seen from the data on build-up from end-March. This is true of many important food and non-food items—onions (133.93%), potatoes (85.57%) and vegetables (66.77%), among other items. So after easing in November (12.7% year-on-year, or y-o-y) primary articles are on an upward trajectory (15.3% y-o-y) in December.
To top it, the northward march of crude oil prices is likely to add to the problem at some point. Even without the much- needed price corrections in diesel, these prices are rising uncomfortably: 10.74% (y-o-y) for the week ended 11 December. The danger is that prices will not be revised with the frequency required to keep prices in line with international prices, adding to the problems elsewhere in the economy. Or if they are revised, that will be in a knee-jerk fashion that may add to inflationary pressures in one go, instead of a smooth change in prices that will enable the use of policy tools to cool down prices.
The other aspect of the prices-on-fire situation is that the government is not helping matters. Agriculture minister Sharad Pawar often makes reckless statements, such as that after the recent onion price spike, that prices will continue to remain high for the next few weeks. More than anything else, it fuels inflationary expectations. While the Reserve Bank of India uses its institutional energy to do something about unhinged inflationary expectations, a carefree (or careless, depending on your perspective) minister, undoes those efforts. That seriously undermines efforts to cool prices.
What has caused inflation in recent months? Tell us at views@livemint.com
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First Published: Sun, Dec 26 2010. 07 05 PM IST