It may be worrying, but it is not particularly surprising that the inflation rate has moved up sharply, by about three percentage points in the past three months. | |
| Crude prices have been close to the $45 per barrel mark after hovering around $40 for many months; this was reflected in retail prices in India after a lag of almost six months and, then too, not fully. China's surging imports of major commodities, while contributing to the oil price situation, have hit other commodity prices hard, particularly steel. |
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| Domestic industry has been maintaining a steady clip for about two years now. Capacities in a variety of industries have been tightening, so producer power has manifested itself. Add to this the second inadequate monsoon in three years, putting pressure on the prices of many agricultural commodities, and there emerges a formula guaranteeing escalating inflation. |
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| Even so, the 7.5 per cent mark being breached in the week ending July 24, came as a shock. Looking below the aggregates, it appears that the unexpected spike was partly attributable to a 180 per cent increase in the price of iron ore. |
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| This may be a statistical blip, and the chances are that this is going to a one-off occurrence; domestic steel producers have been complaining about rising ore prices, but they have not been screaming for help. In the coming weeks, the August 1 revisions in fuel prices will also make themselves felt. So people should brace themselves for a few more weeks of headline inflation in the 7"�8 per cent range, without even factoring in one-off spikes. |
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| Looking further ahead, however, the base effect will kick in. Around mid-August last year, the inflation rate began to climb from below 4 per cent. By October 2003, it was above 5 per cent, peaking in January 2004 at around 6.5 per cent. |
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| The low base from end-July to mid-August last year is, therefore, contributing to the rather uncomfortable numbers today. Even if the factors contributing to rising prices remain in place, the rate of inflation will decline as last year's base price level begins to climb. |
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| There is a global dimension to the current inflationary situation, which the government can do little about other than reducing customs and excise duties on the commodities in question. The expectations are that commodity prices will soften in the coming months as oil supplies increase, demand on the margin gets squeezed out, and China's stated "soft landing" policy of slowing down growth as well as demand for things like steel begins to take effect. |
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| As for domestic factors, the performance of the monsoons has clearly affected some commodities, but foodgrain stocks dampen inflationary expectations in the major commodities and keep the potential spiral in check. |
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| Given the trade and tariff regime now in place, imports should be a viable option in most cases, putting a limit on the ability of domestic manufacturers to raise prices. While the numbers don't look very good, there appears to be little risk of things getting out of hand. However, no one should expect a quick return to the 4"�5 per cent inflation range. |
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