Inflation back up past 5%

The annual inflation rate crossed five per cent for the first time in nine months, on account of higher food and manufactured item prices in February, spooking the stock markets to drop below 16,000.

The data hints at building price pressures in the economy on account of surging crude oil and food prices. It also increases the likelihood that the central bank may keep interest rates unchanged in the near term despite recent demands for lower interest rates to accelerate economic growth.

Government data released today showed that the Wholesale Price Index (WPI) rose 5.02 per cent for the week ended February 23, higher than the previous week's 4.89 per cent. Inflation had last been above 5 per cent on June 2 last year.

Average inflation so far this year is 4.3 per cent, which is within the target of around 5 per cent set by the Reserve Bank of India (RBI) for this fiscal.

Analysts said higher retail fuel prices have contributed to higher inflation. On February 14, the government raised petrol and diesel prices by Rs 2 and Re 1 a litre, respectively. The overall surge in essential commodity prices, which economist Arjun Sengupta has said are at a 20-year high, is also a contributing factor.

The rise in inflation comes as earlier interest rate increases have led to a slowdown in consumer demand. The economy grew 8.4 per cent in the third-quarter ended December 2007, slower than 8.9 per cent in the previous quarter and 9.6 per cent in the first quarter.

The RBI has kept its main lending rate "� the repo rate "� at 7.75 per cent for almost a year, after raising it five times between June 2006 and March 2007.

"The five per cent inflation has not come as a surprise, as there was pressure from oil and food articles. And overall pressure on commodities will continue in the near future," said D K Joshi, principal economist, Crisil.

JPMorgan Chase Bank's Rajeev Malik said, "The RBI is in a difficult position owing to tight onshore US dollar liquidity and rising domestic inflation".

Axis Bank Vice-President Saugata Bhattacharya said he expects average annual inflation in 2007-08 to be 4.3 to 4.5 per cent. "Since, the RBI looks at inflation in the future term, the latest data will be a matter of concern for it," he said.