Inflation warning

Inflation warning

Forecasting is a hazardous business, but here’s one nevertheless. The inflation worm is likely to turn soon.

Wholesale price inflation has been dropping since it hit a peak of 6.9% in the last week of January. By the week ended 1 September, it was down to a two-year low of 3.5%. The steep drop in the inflation rate is partly because of the Reserve Bank of India (RBI), which has been raising interest rates.

But the drop is also partly explained by the base effect—inflation was above 5% through most of July, August and September 2006, thus creating a statistical illusion of low inflation in the same months of 2007.

But inflation then started moving down in the three months after September 2006. This low base is very likely to result in a jump in the inflation rate in the weeks ahead.

Add to that the fact that the government will at some point have to raise the price of domestic oil.

It’s unlikely to be runaway inflation. But a little canter is very likely.