Analysts see inflation go up by this year end

Analysts see inflation go up by this year end
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First Published: Thu, Aug 16 2007. 12 37 AM IST

Updated: Thu, Aug 16 2007. 12 37 AM IST
The let-up in inflationary pressures may be temporary, say economists, who fear that a reversal would be triggered once the government effects the long delayed hike in domestic prices of petroleum products.
Pronab Sen, chief statistician, Government of India, is still hoping that inflation would average around 5% for the current fiscal, but concedes that “the second half of the year could see upward pressure building up, though a clearer picture would emerge after the monsoons.”
The provisional inflation rate, computed on the wholesale price index, for the week ended 28 July was 4.45%. However, the average rate of inflation in the current fiscal at the end of 2 June was 5.22%. In fact, this would be higher, once the provisional data is revised after an eight-week lag. In the current year so
Increasing expenses: High food prices drove inflation into double-digit figures most of last fiscal. That has decelerated to 7.5% in June, but if crop estimates change, the trend could reverse.
far, the gap between provisional and final has averaged 0.23 points.
The Prime Minister’s Economic Advisory Council, in its outlook for the current year released last month, says the lack of price revision for all petroleum products actually meant a suppression of headline inflation rate by 0.35-0.60 points.
Oil prices were last hiked in June, 2006. As a result, because of the high base effect, inflation in the fuel price group went negative in June 2007, so it can only go up now, says research counsellor at National Council of Applied Economic Research, Shashanka Bhide.
Public sector oil companies say they are losing Rs190 crore a day because of the gap between the retail prices at home and the import price for crude which has gone up by 30% since February, when the government reduced oil prices to tame high inflation. Global crude prices are threatening to breach $80 a barrel but the government, fearing political backlash in Parliament, has deferred a decision until after the monsoon session ends on 20 September.
Apart from oil, the global prices of commodities and metals, too, remain under pressure, especially of coffee, grains and lead. The large-scale conversion of grains such as corn into biofuel (ethanol) by the US, Sen says, is pushing up global grain prices.
Higher than double-digit inflation in the primary commodities group, or food staples, drove inflation most of last fiscal. That has decelerated to 7.5% in June, but if crop estimates change, the trend could reverse. In fact, primary product group inflation (provisional) touched 9.8% in the week of 28 July, while it was almost 9% (including 8.4% for food) in the week of 2 June, the latest date for which final figures are available.
“The firming up of global foodgrain prices means that imports will not help in controlling domestic inflation if agriculture does not do well, ” says Dharmakirti Joshi, director and principal economist, Crisil Ltd.
Bhide says inflationary pressures in manufactured commodities continue to be firm and is a matter of concern.
According to Saumitra Chaudhuri, member of the PM’s council, in the case of the manufactured articles group, which has the largest weight of almost 64% in the total index, the average gap between provisional and final rates is close to 0.52 points.
Even the Reserve Bank of India, in its first quarter review of monetary policy, mentioned “the re-emergence of pricing power amongst producers’ as a possible threat to manufactured inflation. The appreciation of the rupee too has had a salutary effect on easing inflationary pressures.
“The sharp appreciation of the rupee has partly shielded domestic inflation against the shock from the recent upturn in global crude prices. This, together with duty reduction, has generally exerted a downward pressure on inflation. But the positive kick from appreciating currency witnessed in the last few months is unlikely to continue as the rupee is expected to stabilise around current levels,” says Crisil’s Joshi.
Sen concedes that the strong rupee would have had a clear impact on wholesale price index, though not on consumer prices. Except for the consumer price indices (CPI) for industrial workers, which decelerated to 5.69% in June, the three other consumer price indices continue to be above 6%.
As a result of all these factors, it is not surprising that most forecasts, despite trends in recent weeks, have pegged the inflation rate for the year at between 5% and 5.5%.
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First Published: Thu, Aug 16 2007. 12 37 AM IST