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Inflation jumps to 0.37% – Out of Control of FM + RBI Governors Hands

September 24, 2009

Inflation is raising its head again, and in a much more aggressive manner than expected by most economists as well as policy makers. Headline inflation, as indicated by the wholesale price index (WPI) rose to 0.37% for week ended September 12 from 0.12% in the previous week. While the absolute level of inflation still appears very small, it is the pace at which it has been rising for last four to six weeks that is worrying.

On a continuous or week-on-week basis, the WPI has been increasing since early this year itself. In the week ended September 12, the WPI registered an increase by 0.2% to 242.6.

What is more worrying is that the rise in prices now being witnessed is not just restricted to agri-commodities. In the week under review, while index for primary articles registered a growth of 0.2%, that for manufactured commodities rose by 0.3%, on a week-on-week basis, clearly indicating the sharp trajectory that inflation was following.

Economists have already been cautioning that inflation was set to rise much faster than expected as the build-up of pressures in the agri-commodity segment could quickly spread into the broader economy fuelled by rising inflation expectations. Consumer level prices in India are already soaring as indicated by the consumer price indices. As per the latest available figures, consumer prices paid by farm workers jumped 12.9% in July from a year earlier. Similarly, consumer index for rural workers was up 12.67% and that for the industrial workers climbed 11.89% in the same month.

The most significant implication of the change in inflation trajectory could be on the monetary policy regime in the country. Although the Reserve Bank of India has assured time and again that it wanted to continue with accommodative policy stance till growth returned, the increasing upside risk in the inflation may force the Indian monetary authority to consider unconventional credit control measures like qualitative restrictions to keep prices in check.

In the latest quarterly review of the monetary policy, the RBI projected 5% inflation by the fiscal end. However, the way inflationary pressures are building in the economy, it is very likely that inflation by the end of the fiscal would touch 7-8% or even higher levels, leaving little room for the apex bank but to start tightening policy by then. The main concern at this stage for the apex bank would be to avoid runaway inflation like that witnessed last year, as once inflation starts rising fast, it becomes self feeding, riding on inflations expectations of individuals as well as institutions.

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