Costly onion pushes inflation to 10-week high

Soaring onion prices pushed food inflation to a 10-week high of 14.44 per cent for the week ended December 18, a development that may prompt the Reserve Bank to hike key policy rates next month to check price rise.

"This is an area of concern no doubt... There has been real increase in the prices of certain food items. We are looking into it," Finance Minister Pranab Mukherjee said.

Food inflation rose for the fifth consecutive week on the back of onion prices which rose by almost 40 per cent on an annual basis touching Rs 75-80 per kg in the retail market. Onion prices, however, have declined since then.

The price rise was also quite steep in case of vegetables, fruits and protein-based products like milk, egg, fish and meat. The price rise in these products ranged between 17 to 30 per cent.

"So far as onion is concerned, we have taken care of it... But the fluctuation in milk, fruit, vegetable and certain commodities have contributed to the inflation. We are waiting for the full monthly figure," Mukherjee said.

"Weekly variations are there. Whether these are corrected in the coming week ...Is to be seen. But I am still holding that year-end inflation may be around 6.5 per cent," he added.

Mukherjee's estimates of year end inflation, however, is higher than  5.5 per cent indicated by Prime Minister Manmohan Singh earlier this month.

The rising in food inflation by 2.31 percentage points from 12.13 per cent in the previous reporting week, experts said, will force the central bank to review its pause on hiking the short-term key policy rates at its quarterly review of the credit policy on January 25.

Food inflation was 21.29 per cent a year ago.

Moreover, the impact of the recent hike in petrol price by about Rs 3 per litre, also pushed up the index of fuel and power by 11.63 per cent year-on-year during the week. The rise in index on account of increase in price of petrol was over 25 per cent.

"If the food inflation persist, RBI may go for a moderate hike of 25 basis points in short-term rates at its next policy review in January," said Crisil chief economist D K Joshi.

On the impact of fuel price hike on inflation, he said: "What is of more concern for overall inflation is the global fuel price. We believe that fuel price will remain a challenge for the government in 2011".

Rising inflation promoted the government to defer any decision on raising prices of diesel despite global crude oil prices soaring to USD 92 per barrel -- the highest in last two years.

"There could be some monetary action before the end of the fiscal if inflation remains at such a high level for sometime," said Standard Chartered Bank India Economist Anubhuti Sahay.