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Inside the inflation mystique

Here are answers to some frequently asked questions on factors behind inflation.

business Updated: Apr 15, 2008 00:39 IST

What are wholesale prices?

Wholesale prices have divergent connotations as determined by their use by different departments. According to the Office of the Economic Adviser, Ministry of Industry, which compiles the wholesale price index, wholesale prices represent transactions at the primary stage that broadly correspond to producers’ prices.

What are wholesale prices? How is wholesale price index measured?

Wholesale prices are essentially the rates that producers charge before traders add profit margins, transportation and packaging costs that reflect in consumer prices. The Wholesale Price Index (WPI) series, as traditionally constructed, is based on the well established Laspeyre’s Index, which assigns quantity weights to various categories of goods to evolve an overall basket to reflect a broad trend.

What are the weights attached to different categories of commodities in the current WPI?

The prices prevalent in 1993-94 are used by the government as the base for calculating the WPI. The WPI is divided into three sub-indices: the primary articles index, the manufactured products index and the fuel group index. The primary articles index, which includes essential commodities such as cereals, fruits and beverages, and oil seeds, carries a weight of 22.02 per cent in the WPI. The manufactured products index also includes food items such as sugar, edible oil and oil cakes and commodities such as cement and steel. It carries a weight of 63.75 per cent. The fuel group index that includes mineral oils and electricity carries a weight of 14.23 per cent.

What is driving inflation currently?

Inflation in India has reached alarming levels and wholesale food prices have surged by 7.41 percent from last year and it is the rise in commodities and food costs that has forced the Asian governments to find ways to freeze the price hikes. One of the major import contents of India's inflation in the current context is the high global prices of both food and non-food commodities. This can be seen the most in the case of edible oil and steel prices. The country annually consumes about 10 million tonnes of edible oils, with imports contributing half of that. In February, India’s vegetable oil imports grew by nearly 300 per cent to 430,000 tonnes compared with 150,000 tonnes in the previous year. Recently, the government slashed import duties to ensure that lower retail prices of edible oil.

How have the global prices of edible oil moved in recent months?

International price of crude palm oil has increased from $770 per metric tonne in the last week of August 2007 to nearly $1,220 per tonne in the last week of February 2008, a rise of 58 per cent. International prices of sunflower oil have increased from $947 to $1,695 per tonne, a rise of nearly 79 per cent.

What about steel prices?

Steel prices have risen manifold in recent weeks and are likely to continue their growth in 2008 by about 7 to 8 per cent on the back of increasing production cost and high consumer demand, especially from infrastructure and electronics consumer goods industries

Industry reports say global steel demand would be driven by BRIC (Brazil, Russia, India and China) nations over the next two years. These countries, accounting for 41 per cent of global steel demand, will continue to see double digit growth in demand for steel.

Intense construction activity in the BRIC nations will keep demand for the metal strong over the next two years.

Indian steel companies claim they have been paying much more for iron ore and coke, because their prices in the global market have surged several times over the past year. The spike has been driven by China, where the economy is growing close to 10 per cent and demand for steel has got an extra boost from Olympic games-related constructions.

More than iron ore prices, steel companies have been hit hard by cost of coke, which has increased 300 per cent in the last 12 months.

Why are steel prices important to tame inflation?

What makes steel price rise significant is that steel prices accentuate the inflationary pressure in the economy, as steel is widely used across industries.