Inching ever higher

After sniffing at an annualised 4.9 per cent in the week to February 16, the inflation rate as measured by the Wholesale Price Index (WPI) inched over the 5 per cent mark for the week to February 23. This is the first time in nine months that the 5 per cent mark has been breached, and the main contributors to the steady acceleration in prices are primary articles and fuels. The former saw an increase of close to 6.3 per cent over the corresponding week of last year, while the latter went up by over 5.6 per cent as a result of the increase in the retail prices of petrol and diesel a couple of weeks ago. Within the primary articles category, food items such as meat, fruits and vegetables saw significant increases "" as much as 5 per cent and 4 per cent, respectively, over the previous week. Some major oilseeds also saw substantial increases. The prices of manufactured goods, by contrast, rose relatively slowly, recording an increase of less than 4.5 per cent over the corresponding week last year.

Food and energy prices are being perceived as critical risks to the stability of the global economy. On the oil front, despite clear signs of a slowdown in the US economy, which usually implies reduced demand for energy, benchmark prices have not only settled at the $100 per barrel mark, they show occasional signs of rising sharply above it. For countries which have not as yet accommodated this situation in their domestic pricing, the gap is growing threateningly wide. Since the likelihood of the price alignment being made in a pre-election year in India is small, particularly for kerosene and cooking gas, it remains a wound that festers below the surface of the weekly inflation numbers; but that does not mean policy-makers can ignore it. Global food prices are also on a strong upward trend for a variety of reasons, ranging from the persistent drought in Australia (a major wheat exporter) to the diversion of food crops to fuel use, which is pushing up the prices of several oilseeds. While it is early days, these trends are beginning to work their way through domestic markets, reinforced by local factors that are contributing to volatility in the prices of, for example, fruits and vegetables.

That inflation is a problem that affects the global economy isn't much comfort to domestic policy makers, who have to deal with it by means of the instruments that they can control. A restrictive monetary position will rein in the overall rate of inflation, but only by keeping down the prices of manufactured goods "" which translates into the already visible slowdown in the sector. Larger imports are now facilitated by the absence of a foreign exchange constraint but, in an already tight global supply situation, price pressures will only intensify. Fiscal policy too can help, by increasing subsidy levels and transfer payments to low-income households, thereby enabling them to subsist in an environment of high food prices. However, these will seriously challenge fiscal discipline. As with any complex situation, all available instruments need to be used and, more importantly, co-ordinated. More than ever, it is imperative that monetary, fiscal, energy and food policies align to deal with the problem.