Price spike spooks markets

Inflation zooms to 3-1/2 year high of 7.5%; nothing to worry, says Govt.

The wholesale price index (WPI) based inflation shot up to a three and a half year high of 7.51 per cent for the week ended July 24, on rising vegetables, minerals and manufactured product prices.

The increase is a steep 1 percentage point over the previous week's level of 6.52 per cent.

With the recent oil and steel price hikes not yet factored in, analysts say inflation is likely to climb in the short term. They expect inflation to peak till August and start dropping in September on the base effect.

In 2003, there was a dip in inflation between the weeks ended July 26 and August 30, after which it stayed on an upward trend till January 2004.

Chief Economic Adviser Ashok Lahiri remained optimistic that inflationary pressures would recede in the next few weeks due to a pick-up in the monsoon. "We expect inflation to come down by the middle of August. The arrival of the monsoon will also help," he told reporters.

Lahiri said the higher inflation for the week ended July 24 was due to a statistical effect, the late arrival of the monsoon and a rise in international commodity prices.

Planning Commission Deputy Chairman Montek Singh Ahluwalia also maintained that the high inflation was not a big problem because it was seasonal and the price situation would improve with the monsoon.

But Saumitra Chaudhri, ICRA's economic adviser, said the hike in steel prices could have a cascading effect. The government should scrap the import duty on steel if it wanted to avoid inflationary pressure in the economy, he added.

Arun Kaul, general manager (finance), Punjab National Bank, said this level of inflation was unexpected. The market was ready for inflation in the 6.6-6.8 per cent range.

"There has been a huge drop in yields. The market sentiment is weak and the trade volume is down," he added.

Subir Gokran, Crisil's chief economist, however, said the rise was not unexpected because of the low base last year.

"In addition, for the first time in many years, we are seeing the combined effect of a number of factors pushing up inflation. Rising global commodity prices and oil prices, tightening capacity and pressure on agricultural prices because of the unpredictable monsoon are all pushing up prices," he said.

However, some of these factors will moderate over time. The high base effect would kick in in October and global commodity prices, including oil, would moderate over the next six months, he added.

While there was no reason to expect an immediate hike in interest rates, the Reserve Bank of India will not be able to ignore an inflation level of over 7 per cent.

The major drivers of inflation were energy and food prices and the price rise in manufacturing was not high enough to merit an immediate hike in interest rates, Gokarn said.

Arvind Virmani, Icrier director, felt interest rates would go up in the long run. "In the light of gradually rising interest rates across the world as well as the likely acceleration of inflation by 1 percentage point over the last year's level, nominal interest rates in India are likely to rise over the next eight months," he said.

Data showed fuel prices stood static at the previous week's level, even as prices of primary articles, including vegetables and fruits, skyrocketed on account of the delayed monsoon.

In the corresponding week last year, inflation was 4.27 per cent. The government also revised the inflation figure for the week ended May 29 to 5.61 per cent, up from the 5.03 per cent reported earlier.

The index for primary articles shot up by 2.9 percentage points owing to a steep rise in the prices of food items and non-food articles. Mineral prices, too, more than doubled during the latest reported week. A whopping 189 per cent rise in the price of iron ore led to a 107.1 per cent rise in the index of minerals to 304.2.

The index for the fuel, power, light and lubricants group remained unchanged at the previous week's level while the index for manufactured products rose by 0.3 per cent due to a rise in prices of food items, textiles, paper, leather, chemicals, non-metallic minerals and transport equipment.