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Government stumped as food inflation hits 14.4%

business Updated: Dec 31, 2010 10:26 IST
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The Cabinet Committee on Prices, an inter-ministerial panel, met on Thursday to review runaway prices of essential commodities as food inflation rose to 14.44% from 12.13% last week, but experts said there is only so much the government can do to rein in prices.

The price spike, which the Reserve Bank of India termed “a new risk” for the economy, caught the government unawares. And its response suggested it was doing too little too late (see graphics for decisions taken at the CCP meeting).

"This (price rise) is an area of concern... earlier, we had thought it was because of the base effect but it is not merely that. There has been real increase in the prices of certain food items,” finance minister Pranab Mukherjee said.
Base effect is a statistical phenomenon that makes prices look high compared to a previous period of low prices, although the real increase may not be very large.

Latest price data released on Thursday showed that vegetable prices were higher by 30%, eggs, meat and fish by 20% and milk by 17%, while prices of staples, such as wheat and rice, were falling.

If prices continue to rise, RBI may be forced to increase key interest rates to control inflation. This can lead to higher EMIs for home loan and other borrowers and a contraction in demand and lower growth for the overall economy.

Prime Minister Manmohan Singh, who chaired the CCP meeting, was briefed by agriculture minister Sharad Pawar on production trends, availability and price movements of fruits, vegetables, meat, fish and eggs. He was also given a lowdown on current stocks of pulses and sugar. Finance minister Pranab Mukherjee and petroleum minister Murli Deora were also present.

Experts, however, warned that rising prices were not merely a factor of demand and supply.

Changing consumption patterns due to rising incomes have resulted in higher demand (and higher prices) for protein-rich foods, RBI deputy governor Subir Gokarn said.

"And there’s nothing much you can do about rising prices of perishable items like vegetables,” Planning Commission member Abhijit Sen added.

Price trends in global markets are also being transmitted from abroad due to interconnected commodity markets, Nagesh Kumar, chief economist of the UN’s Economic and Social Commission for Asia and the Pacific said.