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TRENDS OF INFLATION

Inflation is the overall increase in the cost of products and services.


The inflation rate in India was last reported to be 8.64 percent in June of 2011. Since the year of 1969 till the year of 2010, the average inflation rate in India was 7.99 percent. The inflation rate of the country reached an historical high of 34.68 percent during the month of September in the year of 1974. Lowest was recorded in the month of May in the year of 1976 Inflation situation in the economy continues to be a cause for concern. Despite large scale tightening of monetary policy by RBI and other steps taken by the government inflation continues to remain close to the double digit mark. WPI based headline inflation stood 9.1% in May 2011 against 8.7% recorded in April 2011. WPI based headline inflation stood 10% in 2010-11 compared to average inflation of 3.6% in 2009-10. Growing price of oil in the country is the factor behind the growth of the price of all other commodities. Price rise of potatoes 8.39%, Onion-6.23% (March 2011) Manufactured goods segment recorded an inflation of 7.3% in May2011. In case of fuel and power inflation stood at 12.2%. In case of primary articles inflation stood at 17.7% Core inflation too has moved up from 8% in April to 8.6% in May. Inflation in India in Future- It is expected that the emerging market will perform well withstanding challenges and will grow at 5.9% in this fiscal year 2011. Factors that lie behind this prognosis: International crude oil prices continue to remain high. Global food prices are likely to remain firm in the near term as restoring global market would take time.

Government has recently announced a hike a in minimum support price for goods like paddy, corn for agricultural season. This increase in MSP will also have a bearing on the trend in food prices in near term.

Given the above factors we expect concern on inflation to remain on the policy agenda through the year 2011.

The Business line presents evidence that even as headline inflation figures have touched a 26 year high of 11.05%, the real impact on the common man may be much smaller. By segregating only those products directly consumed by the common man from the basket of 435 commodities in the WPI, they find that the inflation for the 'Aam Admi' is only 7.1%. These products have a 26.32% weight age in the WPI index, and their contribution to the overall inflation is only 17%.

Interestingly,

the

inflation

figures

are

negative

for

pulses,

vegetables

and

drugs/medicines, and zero or negligible for kerosene and electricity. It is only fruits,

edible oils and liquefied petroleum gas that have recorded double-digit rates. These trends are replicated at the retail level too.

It is oil, both petroleum and edible oils iron and steel, which are the drivers of this runaway inflation. Petro-products, with a combined weight age of 6.99 in the WPI, have caused 16.11 per cent of the overall inflation. The edible oil complex (having a total 6.84 per cent weight age, inclusive of oilseeds and oilcakes) has likewise contributed 14.7 per cent and iron & steel (3.64 per cent weight age) another 10.93 per cent. There are two observations in this context. One, while we can take some comfort from the fact that the direct impact on the common man may be much smaller, it may not remain so for long. The higher iron & steel, and especially petroleum prices may soon start making their impact felt on the commodities directly consumed by the common man. Second, it is interesting that the food grain inflation in India has remained under control, albeit temporarily, as compared to rest of the world, and especially our neighbors. Is it because the Government has been more aggressive in its intervention with price controls, export bans and controls, and freeing up of imports in selected commodities? Have these measures had the impact of anchoring inflation expectations and containing practices like hoarding which are natural responses at such times, and which are also significant contributors towards inflationary pressures?

Oil prices and changing incentives


Here is another example of how the high oil prices are changing incentives and living habits. The increased heating and transport costs for the residents of suburban areas are incentivizing people to look to living in the town or city.

Another example of changing lifestyles and incentives is the fact that in March, Americans drove 11 billion fewer miles on public roads than in the same month the

previous year, a 4.3 percent decrease the sharpest one-month drop since the Federal Highway Administration began keeping records in 1942.