Costly onion pushes food inflation to 10-week high of 14.44%

Soaring onion prices pushed food inflation to a 10-week high of 14.44% for the week ended December 18, a development that may prompt the Reserve Bank to raise key policy rates next month to check price rise.

"This is an area of concern no doubt... there has been real increase in the prices of certain food items. We are looking into it," finance minister Pranab Mukherjee said.

Food inflation rose for the fifth consecutive week on the back of onion prices which rose by almost 40% on an annual basis touching Rs75-80 per kg in the retail market.

Onion prices, however, have declined since then.

The price rise was also quite steep in case of vegetables, fruits and protein-based products like milk, egg, fish and meat. The price rise in these products ranged between 17 to 30%.

"So far as onion is concerned, we have taken care of it... but the fluctuation in milk, fruit, vegetable and certain commodities have contributed to the inflation. We are waiting for the full monthly figure," Mukherjee said.

"Weekly variations are there. Whether these are corrected in the coming week ...is to be seen. But I am still holding that year-end inflation may be around 6.5%," he added.

Mukherjee's estimates of year end inflation, however, is higher than 5.5% indicated by Prime Minister Manmohan Singh earlier this month.

The rising in food inflation by 2.31 percentage points from 12.13% in the previous reporting week, experts said, will force the central bank to review its pause on hiking the short-term key policy rates at its quarterly review of the credit policy on January 25.

Food inflation was 21.29% a year ago.

Moreover, the impact of the recent hike in petrol price by about Rs3 per litre, also pushed up the index of fuel and power by 11.63% year-on-year during the week. The rise in index on account of increase in price of petrol was over 25%.

"If the food inflation persist, RBI may go for a moderate hike of 25 basis points in short-term rates at its next policy review in January," said Crisil chief economist D K Joshi.

On the impact of fuel price hike on inflation, he said: "What is of more concern for overall inflation is the global fuel price. We believe that fuel price will remain a challenge for the government in 2011".

Rising inflation promoted the government to defer any decision on raising prices of diesel despite global crude oil prices soaring to USD 92 per barrel -- the highest in last two years.

"There could be some monetary action before the end of the fiscal if inflation remains at such a high level for sometime," said Standard Chartered Bank India Economist Anubhuti Sahay.

For the week under review, the price of cereal declined marginally by 0.70% year-on-year, while pulses fell by 10.79%.

The price of rice went up marginally year-on-year, while wheat declined by 5.51%.

Potato prices also declined on an annual basis by almost 24%.

On a weekly basis, however, the price of most items --barring vegetables -- moved in a narrow range.

The last time food inflation was this high was in the week ended October 9 when it was 15.53%. Food inflation has been in double-digit during most of 2010.

The government was expecting a moderation in food inflation due to a normal monsoon.

However, after a brief decline in November, food inflation again started to surge following rise in onion prices after loss of crop in Maharashtra on account of unseasonal rainfall.

This prompted the government to ban exports of the product and also remove import duty to increase availability in the domestic market.

RBI deputy governor Subir Gokarn had last week hinted that more tightening monetary measures were likely to be taken by the apex bank at its next policy review.

This is due to headline inflation not easing as fast as the apex bank would like and the upside risks still remaining high.

"Inflation is not easing as we would like it to be... Upside risks to inflation are still high," Gokarn had said.

Overall inflation for November was at 7.48%, down from 8.58% in the previous month.