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Good news on inflation may be over

High oil prices and a possible “base effect” could mean that it raises its ugly head in coming weeks, reports Gaurav Choudhury.

business Updated: Nov 08, 2007 22:05 IST
Gaurav Choudhury

Inflation, measured by the wholesale price index (WPI), fell to a five-year low of 2.97 per cent, but high oil prices and a possible “base effect” could mean that it raises its ugly head in coming weeks.

The base effect means that the fall looks large when compared with the rising WPI during the same period last year.

During the week under review, prices of cereals, pulses fruits and vegetables declined, while wheat, poultry chicken, fish-marine, milk and eggs turned expensive.

Inflation started an upward march during November last year, crossing the psychologically worrisome 6 per cent during the early months of 2007 and forced a concerned government to initiate a series of fiscal and monetary steps. Inflation had hit a high of 6.69 per cent in January this year.

However, going forward, there is a potential threat from soaring oil prices on inflation, analysts said.

Oil prices had touched $100 per barrel on Wednesday. New York's main contract, light sweet crude for December delivery, hit an historic peak of $98.62 per barrel. It later stood at $98.00, up $1.30.

According to analysts, the decision by the government to raise prices of petroleum product would have spill-over effect on the prices of commodities which in turn would raise inflation in the future.

The Reserve Bank has set a medium-term inflation target of 3 per cent. The inflation rate for the week ended October 27 is well below that mark, but analysts felt that the high crude oil prices could upset the government’s price management plans.

The RBI, in its monetary policy last month, increased the cash reserve ratio (CRR) by 0.5 percentage points to 7.5 per cent and retained its earlier GDP growth forecast of 8.5 per cent during 2007-08.

With a series of interest rates hikes in quick succession the RBI has quite aggressively tightened the monetary screws.

While the government has cut import duties on several items, including cement and edible oils, the central bank has adopted a policy of monetary tightening to hold the price line.