Date:07/08/2004 URL: http://www.thehindubusinessline.com/2004/08/07/stories/2004080703190100.htm

Back Inflation surges to 7.51 pc

Anil Sasi
Harish Damodaran

New Delhi , Aug. 6

JUST a day after the Chief Economic Advisor, Dr Ashok Lahiri, told presspersons that inflation had peaked and the "worst is behind us", precisely the opposite has happened.

According to the latest wholesale price index (WPI) data released by the Government here today, the year-on-year inflation rate surged by almost a full percentage point, from 6.52 per cent for the week ended July 17 to 7.51 per cent for the latest recorded week ending July 24.

The news came as a complete jolt to both bond as well foreign currency traders, with yields on the benchmark 7.37 per cent 2014 Government of India paper shooting up from 6.14 per cent to 6.28 per cent and the rupee, too, losing around 12 paise during the day, before the Reserve Bank of India restored stability by pumping in dollars.

But traders expect worse to follow in the week ahead. The reason: the latest inflation number does not take into account the increase in prices of diesel and petrol effected by the public sector oil companies on July 31. Prices of diesel were raised by roughly 6 per cent and that of petrol by 3 per cent. This, it is surmised, would push up the inflation rate further, when the Government comes out with the WPI data for the week ending July 31.

However, the immediate impact of the diesel and petrol price hike may not be large. For one, the combined weight of the two transport fuels in the WPI comes to 2.90849 per cent (2.02034 for diesel and 0.88815 for petrol), which is hardly a fifth of the total weight of 14.22624 per cent for the `fuel, power, light and lubricants (FPLL)' group. An average price increase of 5 per cent for the two fuels would mean an increase of one per cent in the FPLL index, from 274.4 for the week ended July 24 to about 277.1 for the week ending July 31. In other words, a jump of less than 3 points. Considering a relative weight of 14.22624 per cent for the FPLL index in the general index, this translates to a rise of 0.4 in the overall WPI, from 186.2 to 186.6 for the week ending July 31.

What is of significance is that during the corresponding period last year, too, the WPI went up from 173.2 to 173.4 for the week ended August 2, 2003. That, in effect, would mean that the inflation rate in the coming week would be in the region of 7.61 per cent, even after taking into account the recent transport fuel hike.

While that may not be good news, it is still much better than the one percentage point jump in the year-on-year inflation rate registered in the latest recorded week. Moreover, there are a few other benign factors that have been at play, the most prominent of them being the revival in monsoon activity towards the end of July.