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Surge in inflation attributed to ‘base year’ effect

NEW DELHI: The Government on Friday expressed concern over the surge in inflation, but assured no respite from the increase in prices till about the third week of November owing to the “base year” effect prevailing now.

The Finance Ministry in a statement sought to “place the matter [inflation and base year effect] in perspective” without “underplaying the seriousness of the concern” and said: “Headline inflation continues to be a matter of concern...The point to be stressed is that the inflation rate for each group [in the WPI] is measured on an annual point-to-point basis. Hence, it is largely influenced by the trend in the corresponding week of the previous year, which is the base year”. In simple terms, the base year effect pertains to inflation in the year-ago period, wherein if the rate of price rise has been too low, even a small rise in WPI now will arithmetically lead to a huge increase by way of inflation numbers.

The Ministry explained that while the headline inflation — as measured by the wholesale price index — surged from 12.44 per cent to 12.63 per cent for the week ended August 9 this year, it witnessed a decline from 4.39 per cent to 4.24 per cent in the same week a year ago. “This trend of a declining WPI continued up to November 24, 2007.”

Even a small movement in the index in the current year is impacted by the “base” and the WPI for the group as well as the WPI for all commodities shows a rise, thereby indicating the rising trend in WPI inflation may continue till October-November this year, as the index had declined up to November 24 last year.

While listing the steps taken in the recent months to tackle the demand-supply mismatches in various commodities the prices of fruits, vegetables, milk and tea were largely governed by localised supply-demand factors.

“It is the movement of prices of these items that are impacting the prices of primary articles.” Ministry sources sought to explain that the prices of vegetables had not increased so much on year-on-year basis, but since prices are often compared with the immediate past, the rise seemed much higher.

The price movements of edible oils were considerable. Even on a year-on-year basis, “the prices of edible oils rose by 15 per cent as there was hardening of prices globally, since more than 60 per cent of demand is met through imports.”

Some of the supply-side measures that are expected to work in the short-term, were the recent approval of open market sales of up to 60 lakh tonnes of wheat, release of an additional five lakh tonnes of non-levy sugar in August and September and the introduction of a scheme for supply of edible oils at a subsidy of Rs 15 a kg.

The government is also examining a scheme for the supply of four lakh tonnes of pulses at a subsidy of Rs 10 a kg.

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