Supplying sense

Written by The Financial Express | Updated: Mar 30 2008, 03:38am hrs
An inflation peak is normally associated with a rise in growth trends. The 6.68% rise in inflation based on the wholesale price index (WPI) shows no such sign. That is the part that is actually more alarming. Also, the surge in inflation has occurred so early this year that there is a danger that the economy could scale more than one peak before 2008 is out. In the immediate short term, the rate is sure to come down, however. Since 2004-05, WPI-based inflation has seen one peak per fiscal. Contrary to usual expectations, that peak has rarely coincided with a surge in domestic fuel prices. In 2007-08, the inflation rate had decelerated until December, from where it has spiked in conjunction with the rise in world commodity prices. As for its link with the growth rate, this has become particularly nebulous. In 2007-08, inflation at 3.2% to early January was lower than the level of 5.9% in the previous year, but the eventual rise since has been sharper than last year. The big question for the government, therefore, is what next Should it expect that the rise is in line with a yearly trend and would not recur soon The problem with inflation management, other than the obvious implications for interest rates in the economy, is identifying the source of inflation. The rise in fuel and energy groups, lets be clear, is just a matter of data. Between primary articles and manufacturing, the pressure is emerging from the former. The manufacturing sector, with a weight of 63.8% in the inflation basket, has contributed only about 55% to the current inflation build-up.

Thus, attention should turn to primary articles. In the current period, primary commodities inflation has jumped by 52 basis points from 6.9% to 7.4%. While that of manufactured products group rose by 120 basis points, largely due to an investment flight to metals in international markets, the inflation in this category was less, at 5.4%. The highest rise has been in steel, for which a speculative element has crept in globally. So, any inflation management story has to look here for solutions. Again, that does not mean reining in commodity exchanges; fruits, vegetables, milk and even poultry prices have all risen, and none of these are traded on the floors. The answer, again, is one of effective supply-side management. Panic does no good.