The steady pickup in wholesale price index for the sixth consecutive month to 9.89% in February 2010 would mean that inflation levels in March would sharply exceed RBI?s baseline projection of 8.5%. So, this will now further increase pressures for corrective steps to bring down inflationary expectations. But any sharp change in the monetary stance of the central bank can deter the incipient recovery and RBI would be best advised to carry on with its guarded approach, as the most recent numbers show that it is the supply constraints that continue to play the dominant role in steering price movements. Though food prices have decelerated from the peak 20.04% in December 2009, it has stuck to the 17%-plus range over the last two months on account of new constraints.
So, while improved supplies have helped push down the increase in rice prices to half the peak levels and that of wheat prices to three-fourths of the top line growth, the sharp cyclical swings in prices of other essentials like vegetables have ensured that food prices remain sticky. So, despite some limited corrections, the food articles continue to punch much higher than their weight, contributing more than a quarter of the increase in the overall WPI, though it only accounts for a 15.4% share in the WPI. The situation is similar in the case of fuel products, where rising mineral oil prices have pushed up the contribution of fuel products to the overall increase in WPI to 14.7%, which is marginally higher than its weight.
But the most important concern for RBI will be about the risk of a spillover of inflationary pressures to the manufacturing sector, where price increases have touched a new high of 7.4%. But the central bank should take comfort in the fact that most of this is accounted for by food products and price increases in the fastest growing manufacturing sectors, like machinery & equipment and transport goods are still relatively benign. Easing supply constraints still remains the best bet for tackling inflation. This is also reflected in the trends in other sectors like cement and steel. Cement prices have declined for the third successive month, with growth of cement production steadily accelerating to a high of 12.4% in January 2010, while price increases in steel have remained below the 3% mark as output growth touches record levels of 16.2%.