The base effect that held inflation to near zero levels has ended. Higher inflation also coincides with a period when the government has changed the frequency of inflation reporting from weekly to monthly. Now, only the primary articles (fuel and agricultural products) are reported on a weekly basis. Manufactured products’ inflation will be available only on a monthly basis. October 2009 is the first month after the reporting frequency changed. Till now, inflation rates have been hovering around the zero mark and even turning negative, due to a high base effect in the previous year.
That has ended now and one can expect rates to start moving higher from November onwards. But the real inflationary impact is visible in the build-up inflation as the government calls it, or year to date inflation. That is at 6.13% in the March-October period versus 5.99% in the same period, a year ago. That may make it seem like inflation is well under control. But the relationship between build-up inflation and reported inflation gives a better picture. Reported inflation in October 2008 was 11.06% compared to 1.3% at present. We are headed for a period of high reported inflation in coming months. On the positive side, inflation has dipped by 0.2% over September.
The inflation in primary articles is at 8.7% in October compared to 12.4% a year ago. Inflation in basic food items is very high at 13.3%, something that is pinching the common man. The fuel complex is cheaper compared to a year ago, down by 6.55%. That is contributing significantly in keeping inflation down.
Manufactured products are not showing any signs of high inflation, with only a 1.36% increase in October. The main contributors to this, however, are iron and steel and basic metals. A sharp drop in the price of ferrous and non-ferrous metals globally has led to this decline. The year to date inflation is at about 4%.
The inflation number for October is 242.2, even if it remains at the same level, in November the rate of inflation will jump, because the year ago figure was 234.2. The general environment seems to be for prices to go higher and not lower. A poor monsoon has put a floor under the prices of crops. Rising demand is giving companies the ability to keep prices constant or even increase them.
The government will be faced with a tricky situation of rising prices and healthy industrial growth. Everybody is watching when and how the monetary and fiscal stimulus will be rolled back. The RBI has made its first move, the government prefers to wait and watch. It moved quickly enough to contain the damage of the financial crisis, perhaps made easier by its popularity and the unanimous decision of governments across the world to do so. There is no consensus for a roll-back, it’s a wait and watch approach.