Oil price hike to push year-end inflation to 6%

The oil price hike will not affect inflation directly, but the move is expected to push the year-end inflation to 5-6 per cent. "The direct impact will be less than 0.5 percentage points," said Saumitra Chaudhuri, economic advisor, ICRA.

The government today hiked prices of petrol by Rs 3 a litre and of diesel by Rs 2 a litre to align them with international oil prices. Prices were earlier increased on June 21, when petrol prices were hiked by Rs 2.50 a litre and diesel prices by Rs 2 a litre.

"The first round impact should be a 0.25 percentage point increase in inflation," said DK Joshi, senior economist, Crisil. He added that if international crude oil prices continued to rise at the current rate, prices would have to be raised again to protect oil companies.

"If prices remain above $60 a barrel, I would expect a price rise after the Bengal and Kerala elections," said Arvind Virmani, Director of Icrier.

He added that average inflation for 2005-06 would be about 5 per cent while the end-year point-to-point inflation might be a little higher. Chaudhuri estimated the wholesale price index-based inflation at about 5 per cent by March 2006 end, if another round of price increase took place.

Rising oil bills may leave less for other expenditures at the household level. "These hikes tend to be contractionary. So, a slight decrease in demand and a fall in prices of other commodities, can be seen," said Pranab Sen, principal advisor of Planning Commission.

The impact on consumers will depend on the ability of companies to pass on the higher costs. "If companies are unable to pass on costs, margins will come under pressure," said Joshi. He added that the price hike and base effect would ensure that inflation crossed 6 per cent by the year-end.

The price rise would make people adjust their oil/diesel consumption in line with their actual costs. "The most important danger in not raising prices was that people would not respond to the actual prices in their consumption pattern. The price rise is extremely important for maintaining growth," said Virmani.

Inflation, however, had been rising in South East Asia, China and even in Latin America, so "we will not lose out", Chaudhuri said.