Finance Friday: WPI Inflation in positive territory – A ‘Catch-22’ situation?
The WPI (Wholesale Price Index) finally moved into the positive territory at 0.12 percent for the week ended September 5, after staying in negative for 13 consecutive weeks.
Primary articles, especially food items, are supposed to have pushed the headline inflation rate as measured by the wholesale price index (WPI). The inflation rate rose marginally from -0.12 per cent a week ago, and 12.42 per cent for the corresponding period in 2008.
The weekly prices of fruits and vegetables have gone up by 8%, poultry chicken by a massive 16% and spices by around 3%. However, this rise in WPI is well in line with the analysts prediction that the inflation rate will turn positive by late September or October. The reasons cited for this expected increase are rather predictable- Weak Monsoons.
Weak monsoons have led to speculative activities especially in the perishable items like fruits, vegetables, eggs and milk, which have added to the pressure.
While Finance Minister and Planning Commission Chairman Montek Singh Alhuwalia had both projected the WPI inflation to turn positive by September, it is likely that this price spiral is likely to spurt given the negative sentiments arising from a very poor monsoon and its adverse effects on the Kharif crops.
The rising inflation over the next few months’ might pose a “Catch-22” situation for the policy makers. The RBI has been planning on making changes to the monetary policies on the economy gradually faring better. But, to contain the inflationary price spiral they will have to gradually withdraw the soft monetary policy which would tend to negate the recovery.
Economists, however say that even though the Reserve Bank of India is already concerned about the inflation rate, a neutral monetary policy will continue until there are stronger indications of economic recovery. In its July policy review, the central bank left its key policy rate unchanged after cutting it by 425 basis points between October and April.
It is also interesting to note that certain new items were added in the Wholesale Price Index (WPI) which will lead to a broader index and a better tracking of the inflationary index. The new items added are important in the sense that they are in tune with the current consumables by most standards like liquor(malted),digital cameras etc.
What do you think? Will the WPI inflation keep at its upward journey or will the policy makers be able to contain this price spiral without compromising the growth of the economy
[This Finance Friday post has been written by Ankit Agarwal, an ERP Consultant by profession, a wannabe entrepreneur and stock market stalker by passion]