Inflation in Consolidation Mood

by - Awanish K Mishra, Editor, Pearl News Network

Inflation has crossed the psychological barrier of 12 percent. It has breached 13 year old record defying bandobast by policymakers. But there is silver lining in the cloud. It has started consolidating, it’s loosing its momentum. Interestingly, the debate of inflation has now shifted to another level. People are more worried about inflation peaking out around 12 percent than the rate itself.

Has Inflation Peaked Out At 12%

Finance Ministry is of the opinion that inflation is consolidating around 12 percent. But it is hesitant to say, whether it has peaked out or not. Peaking out means the rate of inflation will not increase further. Our policy makers are non committal for the short term. They hope to see inflation at 8 percent level by March 2009. Saumitra Chaudhary, Member, PM’s Economic Advisory Council has recently said, “Inflation may peak in November-December and slip into single-digit by March 2009. Going by the current price situation, there may be another round of monetary tightening.” Finance Ministry’s Chief Economic Advisor Arvind Virmani is cautiously optimistic. At a CII conference in Chennai, he said, “The uncertain oil prices make it difficult to make short-term predictions, but in the next 12 months, the inflation rate would return to normal levels of 5-6%.” In my opinion, moderation in oil demand by developed countries, growing strength of dollar and near normal monsoon may bring inflation below 10 percent by November-December 2008.

It’s Cooling Down!

Let us see which components of wholesale price index are fueling inflation. As regards to inflation data dated 26th July, out of a total of 98 articles in primary article group, 18 articles have shown a decline in prices as compared to July 19, 2008. Another 53 articles have shown no increase in prices. Prices of 18 articles (out of a total of 19) in commodity group ‘fuel and power’ have not shown any increase. In the case of ‘manufactured products’, out of a total 318 commodities, a large number, 299 in all, have shown no increase in prices over the last week. In the case of 4 commodities there is a decline in prices. The annual inflation rate for the group of 30 essential commodities at 6.66 per cent was marginally lower than the inflation of 6.67 per cent recorded in previous week. Only 15 products, particularly the cotton and woolen yarn, woolen cloth, groundnut cake, white printing paper, ball bearings, caustic soda, cement, newsprint and sugar witnessed an increase in prices. This indicates that inflation is more or less stable. Global Forces Fueling Inflation Indian inflation has much to do with global developments. It’s due to soaring oil and commodity prices. It has its root in the Gulf and Western countries. In a span of 5-6 months the rate of crude oil almost doubled to 145 dollar per barrel. Budgetary estimates made at 100-110 dollar per barrel went haywire. The Government was compelled to take unpopular measure of hiking petro prices. Consequently wholesale price based inflation jumped from 8 percent to 11 percent alarming consumers as well as market participants. The fact remains that Indian inflation is very much a result of growing demand led by increase in per capita income. It is, therefore, that stiff monetary tightening by RBI is taking time in delivering desired result.

Who’s Responsible?

Who is responsible for inflation? The government, the global developments or the people. All of them are responsible to some extent. The Government because it didn’t foresee the spurt in oil price and didn’t increase the rate of domestic petro prices in consonance with rising oil prices; it didn’t book oil in futures market to buffer any upswing in prices. Global developments like Iraq oil syndrome, Israel –Iran imbroglio, monopoly of OPEC countries on oil supply and poorly regulated oil future market have worsened the situation. The rise in per capita income has equipped people with surplus money to spend which has led to spurt in demand leading to demand-supply mismatch.

Ray Of Hope

Oil prices have declined from the peak of 145 dollar per barrel to below 120 dollar per barrel. Slowdown in global economy, increase in production by OPEC nations and proposed tightening of regulatory mechanism governing oil futures may bring it further down. Normalcy of monsoon may ease pressure on food grain prices. Hike in CRR and Repo Rate will start showing their impact in coming days. These factors will keep a check on inflation and stabilise it further.

Government Should Act

ToughIn the meantime, Government should act tough on hoarders. This will dampen bullish sentiment in commodity futures market and result in fall of prices. It should resort to purchase of oil options keeping in view further escalation in oil prices. The fact that the Government is ready to compromise with GDP growth rate in order to contain inflation and curb inflationary pressures is enough to indicate its seriousness, but this must be combined with prudent foresight and coherent action.

Disclaimer : The views expressed by the author in this feature are entirely his own and do not necessarily reflect the views of PIB

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