Fuel prices dominate outcome; Manufactured products remain modest

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Headline inflation

, measured by year-on year changes in the wholesale price index fell to 4.1 per cent by March 2006 from 5.1 per cent a year ago.

The average

WPI inflation rate eased to 4.4 per cent during 2005-06 from 6.4 per cent a year ago.

Mumbai, Aug. 30

Inflationary pressures will dog the economy as crude prices continue to rule high. "The outlook on inflation as well as the choice of the appropriate manner of dealing with the pass-through of oil prices remains clouded," says the RBI Annual Report, 2005-06.

During 2006-07, while headline inflation has remained within the indicative trajectory, upward pressures are seen emanating from dearer primary food articles and crude.

Headline inflation, measured by year-on year changes in the wholesale price index (WPI) fell to 4.1 per cent by March 2006 from 5.1 per cent a year ago. Hike of short-term interest rates such as repo and reverse repo rates, and cash-reserve ratio helped stabilise inflation expectations in the face of rising international crude prices and increasing domestic demand. The average WPI inflation rate eased to 4.4 per cent during 2005-06 from 6.4 per cent a year ago.

Cross-country analysis

Cross-country analysis shows inflation in India is higher than developed economies, but comparable to most of the emerging economies. Fuel prices dominated the inflation outcome in 2005-06. Mineral oils inflation alone contributed about 40 per cent to the headline inflation.

Although fuel prices were the key driver of domestic inflation in 2005-06, domestic prices of petroleum products continue to lag.

Manufactured products inflation remained modest. It eased to 1.7 per cent (y-o-y) at end-March 2006 from 4.6 per cent a year ago, reflecting stable inflationary expectations, productivity gains as well as increased competition. Since end March 2006, domestic iron and steel prices have again gone up by 10.7 per cent (up to August 5, 2006) in tandem with international price movements.

CPI edges up

Consumer price inflation edged up largely reflecting higher food and fuel prices. All measures of consumer price inflation recorded an increase: the CPI for Agricultural Labourers and Rural Labourers recorded a relatively higher order of increase in 2005-06 as these indices have higher weights for food products. Food prices remained firm for greater part of the year initially on concerns about unsatisfactory progress of the South-West monsoon and subsequently due to damages to some crops on account of excessive rainfall and floods in parts of the country. Prices of services such as medical care, and transport and communication also moved up.

(This article was published in the Business Line print edition dated August 31, 2006)
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