Food prices push inflation to 10-month high. Worse ahead

Is price rise making your life difficult? It’s going to get worse, say economists.

The wholesale price index (WPI), one of the measures of price rise, or inflation, reached a ten-month high of 4.78% in November, the government said on Monday. “It is much higher than expected,” said Anubhuti Sahay, an economist at Standard Chartered Bank. Inflation in October stood at 1.34%.

What does that mean to you and me?

Higher EMIs or extended tenures on loans, for one. The positive rub-off could be a better interest rate on fixed deposits as the cost of money goes up. That may happen from January. “We expect the Reserve Bank of India to start raising rates then,” said Tushar Poddar, an economist at Goldman Sachs, Mumbai.

Most economists DNA spoke to concur. Inflation can head only one way from here, they say.

“We expect it to be around 7-7.5% by March 2010,” said Rajeev Malik, associate director and head (India & Asean economics), Macquarie Capital Securities, Singapore.  ABN Amro Bank economist Gaurav Kapur estimates “around 8%, with an upward bias by the same time”.

The major reason for the rise has been galloping food prices due to supply shortage. “This inflation is different from that witnessed in 2008 on account of it being supply-driven,” Malik said.

The worst monsoon since 1972 has meant the kharif crop has taken a beating, leading to a decline in food grain production. To boot, there has been a drop in the production of milk, sugar and vegetables. “A drilldown of the numbers indicate that the main rise was in food products,” said Indranil Pan, chief economist, Kotak Mahindra Bank.

Food article inflation has rocketed 16.71% since last year. Statistically, the increase is not clearly reflected in the overall inflation figure of 4.78% because food articles have only a
15.4% weightage in the index. But the individual pictures say it all: the price of potato, the most used vegetable, has doubled since last year. Aggregate vegetable prices are up 17%; onion and sugar 32.4% and 53.8%, respectively.

The price of pulses, a major source of protein for Indians, has gone up by 35.2%, with tur, or arhar dal, topping the three-figure mark for the first time.

Kotak’s Pan explains the statistical glitch. “While food items have less weightage in the basket of WPI, in the consumer price index (CPI), food items and primary articles have a very high weightage. Naturally, it (CPI inflation) will be up, and is a matter of concern,” he said.

Food inflation numbers released last week showed that in the week ending November 28 food prices were 19.1% higher than they were during the same period last year.  

Union finance minister Pranab Mukherjee last week sought the approval of Parliament to spend an extra Rs3,458 crore to subsidise the spiralling food prices.

The trouble is that manufactured goods prices also rose by 4% over last year. Manufactured goods constitute 63.75% of the overall WPI index.

“(The rise in manufacturing inflation) is clear evidence of inflation climbing up in November on the back of not just primary articles but also manufactured products,” said Shubhada Rao, chief economist, Yes Bank.

Though the current inflationary trend is because of supply-side issues, with demand picking up, experts expect this to add to inflation. “With demand picking up, we expect firms to have a greater ability to pass through higher costs,” said Sonal Varma, an economist with Nomura Securities.

Therefore, supply-side inflation may easily translate into demand-side inflation, if inflation expectations are not anchored, she said.

With inputs from Nitin Shrivastava and agencies