The Hindu Business Line : Inflation calmed, not beaten

With the rate of inflation declining steadily in recent weeks to touch a 10-month low of 5.91 per cent (week ended December 27), there is possibly a smug feeling in New Delhi that the price situation is fully under control. The fact is it is not. International prices of an array of commodities have no doubt declined in the last four months. While global growth concerns have weakened the demand side, drying up of liquidity, rising inventories and exit of speculative capital have contributed to the poor price sentiment. Producers have promptly responded with output cuts — OPEC has cut crude output by as much as 4 million barrels a day. There is reason to believe that supply is declining faster than demand as a high rate of compliance on part of OPEC and continued disappointing non-OPEC production are more than offsetting demand weakness.

It is most likely, therefore, that in the first quarter of 2009, oil balances will start to tighten despite weak demand. There is then the strong possibility of the US dollar turning weak over the coming months, which in turn will lift commodity prices in general. Metal producers too have responded to falling demand by slashing production, and postponing fresh investment. These output cuts are sure to cause problems in the future. The positive effects of the slew of bailout and stimulus packages announced by major economies will begin to be felt in the marketplace at some point of time. On the agricultural front, prices overshot to the downside in the second half of 2008. Weather aberrations in Argentina and Brazil are currently causing some anxiety. There are incipient signals of speculative capital once again moving into agri-markets. Put all these factors together and you get the distinct impression that many commodity markets may be bottoming out.

Bucking the global trend, food prices in the domestic market have held up because of sharply higher support prices and continued robust demand. Also, Kharif 2008 output has fallen short of the target. A weak rupee has made imports of essential food products like edible oil and pulses relatively more expensive. Consumers are just marginally better off than they were earlier during times of double-digit inflation. The poor deserve support and protection from any unfriendly market prices. The Government should not repeat the mistake of discontinuing supplies of essential food products such as cooking oil through the Public Distribution System merely because prices have declined from record levels. The upside risk to commodity prices, especially of energy and agriculture products, is real. The fight against inflation must continue.

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