Inflation at its 11-month low of 4.28 percent

Inflation declined to an 11-month low of 4.28% for the week ended June 9. Although the strong base effect was the overriding factor leading to softening of the inflation rate, a decline in the wholesale price index (WPI) was a welcome change. Prices of food articles including fruit and vegetables, cereals and pulses saw a decline during the week. The last time inflation was this low was when it touched 3.9% in the last week of April 2006.

The declining trend could also augur well for consumers who are facing the brunt of high interest rates following tighter monetary measures introduced by the central bank over the past few months. Although a rate cut may not be on cards yet, this could stabilise interest rates for the time being. The WPI, on which inflation is based, fell 0.05% in the week ended June 9 compared to the previous week. The decline in index was mainly owing to the fall in food prices across the board in both categories of primary articles and manufactured products.

Among primary food articles, there was a decline in the prices of fruit and vegetables (0.5%), cereals (0.6%) and pulses (0.8%). In the manufactured food products category, there was a 2% decrease in prices of soyabean oil, coconut oil and khandsari. In the edition dated June 22, ET had reported that inflation would fall to 4.4% and hover around the mark in June. RBI has targeted inflation between 4% and 4.5% for 2007-08. Economists are of the view that this is good news. “There is a clear shift from the high inflation rates experienced in the economy in the recent past,” Centre for Monitoring Indian Economy (CMIE) executive director Mahesh Vyas said. Economists, however, caution that inflation in manufactured products remains high. “Even as the overall drop in inflation is good news, it’s as high as 5.2% in manufactured goods,” Economic Advisory Council to the PM member Saumitra Chaudhuri said.

Crisil principal economist DK Joshi points out that inflation in the manufacturing sector is fuelling concerns of overheating in the sector. The manufactured goods contributing to high inflation in the category include cement, iron and steel, edible oils and grain mill products where inflation is a high 12%, 10%, 14% and 11% respectively. Even as the base effect has played a role in lowering inflation, economists say there are other factors responsible. “Previously, the inflation rates had shot up due to supply-side constraints and a robust demand.

With the government stepping in to ease supply bottlenecks and RBI controlling demand through a tighter monetary policy, the government has ensured that inflation stays under control,” Mr Vyas said. The monetary tightening of the economy is also a lowering factor, says Mr Joshi.

Source:

Article:- The Economic Times - June 23, 2007

Statistics:- Press note of Office of The Economic Advisor (9th june, 2007)

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Inflation drops to a 58-week low of 4.28% - CMIE

Profiles in Brief:-

Mahesh Vyas - Executive Director - CMIE

Mahesh Vyas began his professional career as a research assistant with Centre for Monitoring Indian Economy (CMIE) in 1980. He did his graduation in science and post graduation in Economics & Statistics. He then moved to International Economics to research the economics of East Asia and China between 1982 and 1985. Besides, he has worked on several sectoral studies and developed new systems at the CMIE.

SAUMITRA CHAUDHURI- Member, Economic Advisory Council to the PM

Saumitra Chaudhuri is Economic Advisor with ICRA Limited, which is a full service credit rating agency, and an associate of Moody’s Investors Service. Since January 2005, he is a Member of the Economic Advisory Council to the Prime Minister. Basic degree education in Science; studied economics at the Centre for Economic Studies & Planning, School of Social Sciences, Jawaharlal Nehru University, New Delhi. Economic Advisor & Research Co-ordinator since early 1993 and responsible for research in contemporary economic developments and policy formulation. Member of ICRA’s Rating Committee and the Executive Editor of the quarterly publication – Money & Finance. Led development effort in public finance ratings involving analytical examination of economic and fiscal information of individual States of the Union, as also that of municipal bodies and other agencies engaged in urban economic infrastructure.