Inflation may top 10% on oil price hike
A fuel price hike could push up inflation into double-digit zone. At $125 a barrel, the price of the Indian basket of crude oil has more than doubled from the levels a year-ago. Prices of petrol and diesel, on the other hand, have seen a very modest jump of about 3-5 % during the same period.
The disproportionate increase in fuel prices vis-a-vis can be attributed to the government’s attempt to curb inflationary trend in the economy that grew at 9% in FY 2008. Inflation at 8.1% during the week ended 17 May 2008 has already touched a four-year high. Hike in prices of petrol and diesel is likely to take place anytime soon.
Inflation is likely to be 10-10 .5% after petroleum price hike (assuming that kerosene and LPG cylinder prices will be left untouched). In the recent past, whenever there was a hike in prices of diesel and petrol, wholesale price index (WPI) and price index for fuel products jumped substantially in the same week and in subsequent weeks.
Historical trend suggests that a hike of Rs 2 a litre for petrol and Rs 1 per litre in case of diesel pushes up the WPI more than a point in subsequent two weeks. If we assume the trend is likely to repeat this time as well, WPI will touch a level of 233-233 .5 by the third week of June 08 if the hike happens this week itself. This translates into an inflation rate of 10%. If the hike is more to the extent of Rs 5 in petrol and Rs 2 in diesel, then inflation might even touch 10.5%.
Further, the double-digit inflation may be just the tip of the iceberg as it accounts only for the direct effect of fuel price hikes on domestic inflation. The cascading effect of such a hike in domestic prices of fuel products is huge but difficult to quantify. For instance, increase in prices may lead to increase in freight rates, putting pressure on transportation cost thereby pushing up commodity prices.
Pressure on raw material cost for many industries in terms of rising crude oil prices may also lead to increase in prices of many products ranging from toothbrush to car tyres. All these commodities form a part of wholesale price index . Thus the effect of increase in prices of these products will be realised gradually. Given this, there is no hope for softening inflation numbers at least in the near future.
Source: The Economic Times
Tags: crisis, inflation, price rising