The Hindu Business Line : Inflation likely to touch double-digits

New Delhi, June 4 The price hikes in petrol, diesel and liquefied petroleum gas effected on Wednesday may push the headline inflation rate within touching distance of 10 per cent.

The underlying calculations for this are simple. Diesel, LPG and petrol have respective weights of 2.02034, 1.83731 and 0.88815 per cent in the overall wholesale price index (WPI). These three together make up a big chunk of the index for the ‘minerals oil’ sub-group, which has a 6.98964 per cent weight.

The Centre has made petrol costlier for the consumer by 10-11 per cent, with the same ranging between 8-9 per cent for diesel and 17 per cent for LPG. Now, given that there is nothing called a ‘wholesale price’ in either of these products, one can assume the retail price increases to be correspondingly reflected in their wholesale indices.

On the whole, it can be taken that the Centre’s latest fuel price hike would push up the index for ‘minerals oil’ by an average of 10 per cent. That would mean that the ‘minerals oil’ index would move up from the current 426 to 468.6 for the week ended June 7 -- an increase of 42.6 or, for simplicity’s sake, 42 points.

A 42 point jump in the ‘minerals oil’ index, on a relative weight of 6.98964, would translate into a rise of 2.9 points in the all-commodities WPI. The latter would, then, go up from the last recorded reading of 229.6 (for the week ended May 17) to 232.5 (for the week ended June 7). And all this is ceteris paribus, i.e. assuming that the indices for all other commodities remain unchanged during this three-week period.

Since the base WPI for last year (the week ended June 9, 2007) stood at 211.8, it would take the headline inflation rate for the week ended June 7, 2008 to about 9.8 per cent. In other words, close to double digits even after discounting for any possible increases in the indices for other commodities.

In fact, the impact of the latest fuel price hikes on the WPI would be more, but for the seeming anomalies in the weights assigned to individual commodities. To illustrate, the combined weight of diesel, LPG and petrol in the WPI, at 4.7458, is just marginally higher than the 4.36708 for milk (actually lower, if one adds butter and ghee!).

What’s more, the 2.02034 per cent weight for diesel is even below the 3.61883 of sugar. Thus, controlling milk and sugar prices would have a more salutary effect on the official inflation numbers than forcing oil companies not to touch diesel.