Inflation Eases, But Don’t Dream Yet

The inflation figures for July, released today (Tuesday, August 14, 2012), paint a confusing picture. Overall inflation has relented a bit and comes in at 6.87%, measured on a year-on-year basis. This is lower than most expectations; various polls had estimated the figure close to 7.5%.  Last year, the inflation figure for July had come in at 9.36%.

So, what’s brought the price levels down? Manufactured products actually, which have a weight of about 65% in the index. Prices in certain product categories — such as “beverage, tobacco and tobacco products”, “paper and paper products”, “leather and leather products”, cotton textiles — are at the same level as last July.

That is a relief and the stock markets rallied immediately, in the hope that Reserve Bank will now have enough moral and economic fire-power to cut interests rates. 
However, that seems unlikely to happen so soon.
For one, RBI doesn’t act on the basis of data for only one month. It has to be convinced that the rate of rising prices is slowing down on a secular basis.
But, more importantly, there are some bugs and time-bombs hidden away in the data. For instance, food inflation is up to 10%, compared to 8.2% in July 2011. Now, that’s a source of worry — given the reluctant monsoons this year, food prices have the potential of ratcheting up further.
Look at what’s bumping up food prices. Potato (yes, that most humble of vegetables) prices have jumped 73% in July compared to the prices prevailing in July 2011. In fact, potato prices have almost doubled since March 2012! Prices of vegetables on the whole are playing havoc — prices are up 24%! 
Even the protein sector is looking scary: pulses are up 28%, while prices of  eggs, meats and fish together are up 28%. 
Therefore, this current dip in prices may not bring the kind of succour that people were expecting. 


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s