Return of inflation?

After nearly two years of fairly subdued inflation, is it possible that prices are once again picking up momentum? Beginning in early November, for three consecutive weeks wholesale price inflation on an annual basis - as measured by the official Wholesale Price Index (WPI) and on a point-to-point basis - has been over 7 per cent. And this is well after the effects of the September oil price hike should have worked themselves out.

There was a marginal decline in wholesale price inflation in the week ending November 18, but what should be worrying is that at a time when inflation should be declining, if not remaining constant, because of the market arrivals from the kharif harvest inflation may well be accelerating.

During much of the current financial year, annual wholesale price inflation on a point-to-point basis has been above 6 per cent, considerably higher than the inflation rate of 3 to 4 per cent that ruled during most of 1999-2000. This is not yet reflected in consumer price inflation which going by the statistics for October is either declining or is negative. Inflation based on the Consumer Price Index for Industrial Workers fell in October, compared to the same month in 1999. And there was negative inflation as measured by the consumer price indices for agricultural and rural labourers. But considering that consumer prices seem to respond with a lag to the movement in wholesale prices, the recent trend in the latter may be a better pointer to the future.

A jump in the inflation rate was inevitable after the hike in oil prices in late September. WPI-based point-point inflation did increase sharply between the week ending September 23 and September 30 from 6.3 per cent to 7.8 per cent. However, the puzzle is that instead of subsiding in the weeks since then the momentum in prices has more or less been maintained all through October and November. It has even picked up in the past three weeks. The oil price hike cannot be blamed for the ongoing spurt. It is instructive to compare the effect of two oil price hikes - in October 1999 and in September-October 2000. While the October 1999 hike could be considered the more far-reaching because it involved a 40 per cent increase in the price of diesel (which is a direct input cost into the transportation of almost all commodities), inflation, after an initial spike, remained under 3 per cent during last October and November. This has not happened this year; for eight weeks since the end-September oil price hike WPI-based inflation has been close to or above 7 per cent.

If the oil price hike cannot be blamed for the continued rise in prices, what could be the reason? Two reasons suggest themselves. The first is that the usual seasonal decline in prices that takes place from mid-October onwards has not taken place this year. This could be an outcome of the less-than-satisfactory 2000 monsoon. The result has been a near-absence of any moderation in overall prices compared to the period after the kharif harvest of 1999. This could foretell a further deterioration though fortunately the prices of food articles are not rising faster than before and the 40 million tonnes of stocks with the Government is in any case sufficient ammunition to fight any flare-up in at least cereal prices.

The second and equally worrying cause for the ongoing spurt in prices is the upward march of the prices of manufactured products. Strangely, even as industry complains of a demand recession and intense import competition there has been a slow but steady rise in the WPI for manufactured products. If this is a sign of the onset of stagflation then the short-term outlook for Indian industry cannot be very positive.

In recent months, the RBI has been suggesting that core inflation, that is, inflation stripped of sharp fluctuations like the hike caused by the rise in oil prices - has been declining in the past couple of years. It may just be possible that this trend has begun to reverse itself. It may be too early to sound the warning bells about an impending return to double-digit inflation, but the signs are all there that the months of low inflation may be a thing of the past.

CRR

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