Govt expects inflation to peak at 13.2% in Oct

Govt expects inflation to peak at 13.2% in Oct
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First Published: Tue, Sep 16 2008. 10 27 PM IST

Updated: Tue, Sep 16 2008. 10 27 PM IST
New Delhi: Although inflation has been falling for three straight weeks, an internal government note circulated among policymakers forecasts that it is likely to peak at 13.2% next month.
India’s annual inflation rate, comparing the Wholesale Price Index, or WPI, of the current year with that in the same week a year ago, declined to 12.1% for the week to 30 August. It was 12.34% and 12.4% in the two weeks previous to that.
The note, reviewed by Mint, predicts that inflation would remain in double digits till February. While the Reserve Bank of India (RBI) expects inflation to come down to around 7% by the end of March next year, the note suggests that it may decline only to 7.6% by that time.
The note, written by a senior bureaucrat, was sent to some top decision makers in the government in late August, said a government official, requesting anonymity. He declined to name the author or the recipients.
Economists agreed that the declining trend in inflation might reverse sooner than later. “I do not think inflation has peaked,” said Indranil Pan, chief economist at Kotak Mahindra Bank Ltd.
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“Even though we are expecting inflation to be lower next week due to decline in ATF (Aviation Turbine Fuel) price, the trend may reverse soon due to a high base effect and possible reversal in commodity prices.” Pan expects inflation to peak at around 13% in mid-December.
Citigroup Global Markets India Pvt. Ltd has said in a recent report that it expects week-on-week inflation numbers to be “benign,” but year-on-year numbers will remain in double digits till the end of this year.
Yashika Singh, head of economic analysis at commercial information provider Dun and Bradstreet Corp., said the recent decline was more due to the impact of the base effect, although the continued fall in oil prices has partially contributed to the decline.
“Although the WPI has grown as compared with the previous week, the rate of inflation has fallen. This is largely because the proportionate increase in the index measured week-on-week is less than what it was in the previous year, thus nullifying the base effect,” Singh said. “Going forward, inflation may remain at this level till December.”
Inflation crossed into double digits after the government raised fuel prices in the first week of June to reduce losses of state-owned oil marketers, who were selling fuel much below cost. After peaking at $142 a barrel on 3 July, the price of India’s crude basket has now fallen below $100.
On the issue of whether headline inflation reported by the government is overstated, the government note says the provisional inflation numbers are understated by more than half a percentage point. Revisions in provisional figures started to widen since January due to late reporting of increase in prices of minerals and mineral products. Such upward revisions picked in March.
The note further goes on to suggest that to break the trend of current unidirectional and upward nature of revisions, provisional WPI numbers should be compared with provisional WPI of the previous year.
At present, provisional figures of WPI is compared with final WPI numbers of the last year. Thus, the revised inflation rate tends to be higher than the provisional rate.
“This will make the rate of inflation calculated using provisional indices comparable with the rate calculated subsequently using revised indices at both ends,” the note said.
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First Published: Tue, Sep 16 2008. 10 27 PM IST