Inflation turning broad-based

Flagging concern over inflation becoming generalised, the Reserve Bank of India (RBI) on Thursday said a rise in the prices of manufactured products, along with elevated food prices, may contribute to inflation expectations.

Inflation for non-food manufactured products remains above the medium-term trend of four per cent. It stood at 8.5 per cent in March and later dipped to 7.3 per cent in April, before rising to 7.3 per cent in May, RBI said in its mid-quarter review for 2011-12.

The pattern of inflation for non-food manufactured products inflation is a matter of particular concern. Besides reflecting high commodity prices, price (inflationary) pressures are more generalised inflationary ones.

Citigroup economist (India) Rohini Malkani said inflation for non-food manufactured products was largely driven by high commodity prices, given commodities such as basic metals, machinery, textiles, rubber and plastic products comprise 60 per cent of the overall index. Rising wages and costs of service inputs are apparently being passed on by producers along the entire supply chain. Rupa Rege Nitsure, chief economist, Bank of Baroda, said the demand for products from the rural sector on the back of good monsoon last year, remained robust. Also, the wage increases to compensate employees for the price rise was shaping the trend of inflation.

Headline wholesale price inflation (WPI) remains elevated. The main drivers of WPI inflation in April-May period were non-food primary articles, fuel group and non-food manufactured products. The headline WPI inflation rate stood at 9.7 per cent in March. In April, it fell to 8.7 per cent.

Brinda Jagirdar, general manager and head of economic research, State Bank of India, said while demand-side pressure was evident, there was no indication of across-the-board capacity constraint. Since managing inflation expectations is crucial, RBI’s decision to raise rates can be seen as a step to contain the spiral before it gets entrenched.