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Inflation at 8.24%; steps to curb it likely

Inflation climbs to a new high in 45 months, although essential food items like fruits and vegetables turn cheaper, reports Gaurav Choudhury.
Hindustan Times | By Gaurav Choudhury, New Delhi
UPDATED ON JUN 11, 2008 08:35 PM IST

Inflation appears to have defied gravity.

And scores of measures taken by the government and the Reserve Bank to contain prices are yet to show results.

The rate of inflation, based on wholesale prices, touched a nearly-four-year-high of 8.24 per cent in the week ended May 24, up from 8.1 per cent in the previous week, according to the government’s latest price update released on Friday.

The government, with the election clock ticking away, has chosen to blame it on factors beyond its control—a relentless surge in global crude oil costs and high commodity prices.

Finance Minister P Chidambaram admitted the sustained spike in “inflation was a problem,” and said the government is “willing to take more measures.”

“The UPA government is confident that it will, with the understanding and support of the people, overcome the current difficulties,” Chidambaram said.

This is not the first time the minister and other government officials have echoed such views, but the reality on the ground seems to point in a different direction.

Moreover, the latest data doesn’t include the impact of this week’s decision to increase fuel prices. The fuel price hike is expected to, directly and indirectly, drive up the inflation rate by at least one percentage point.

“There are new pressures on the inflation rate. The depreciation of the rupee and rise in prices of crude oil have negated some of the positive steps taken by the government to contain inflation,” said D K Joshi, principal economist with credit rating agency and consulting firm Crisil.

Stung by skyrocketing global crude oil prices that had reached $135 a barrel last year, the government on Wednesday announced a hike of Rs 5 per litre increase for petrol, Rs 3 per litre for diesel and Rs 50 per LPG cylinder.

Higher petroleum product prices carry the danger of fuelling inflation as a worried government grapples with policy options to contain a runaway price line in an election year. It could also force monetary authorities to hike
interest rates further, which, in turn, could slow down investments and growth of the broader economy.

In Hyderabad, Reserve Bank of India Governor YV Reddy said on Thursday that the central bank would take all measures to curb inflationary expectations.

“We are vigilant and ready to take recourse to conventional and unconventional measures required to anchor inflationary expectations,” Reddy said.

Reddy, however, said the RBI had limited options to contain the runaway price line.

“The policy space available to RBI is basically confined to managing aggregate demand through money supply, interest rates, exchange rates and flow of credit through banks,” he said.

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