High Base Effect of Food Inflation

08 September 2011 - Which Way to Pay

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High Base Effect of Food Inflation

The Government has revealed that food inflation has fallen to a single digit percentage at 9.55% for the week ended 27 August. The previous week saw annual food inflation at 10.05% as measured on the basis of the Wholesale Price Index (WPI). In the corresponding week of 2010 The rate of price rise of food items was 14.76% proving India is managing to brace against inflation even amidst the economically testing times.

The Government’s statistics revealed that the fuel price index climbed 12.55% and the primary articles index was up 13.34%, compared with an annual rise of 12.93% a week earlier.

Significant price drops regarding the lesser value of food inflation are notably pulses which fell in price 1.56% year-on-year, while wheat became cheaper by 1.04% during the week ended 27 August. However, other food items became more expensive during the week under review:

Onions grew dearer by 42.03% on an annual basis, while potato prices were up by 13.38% during the week under review. Fruits became 16.57 % more expensive and overall, prices of vegetables shot up by 22.42% on an annual basis in the week ended 27 August. The prices of eggs, meat and fish were up 7.26%, while milk and cereals became dearer by 9.12% and 5.45%, respectively.

The notable price hikes in some food items undermine the overall rate and as such the decline seen could also be attributed to the high inflation rate of over 14% in the corresponding year-ago period. This phenomenon is known as the ‘high base effect’ in economic parlance.

The Reserve Bank of India remains set on fighting domestic inflation, which stood at 9.22% in July, despite the weakening global conditions. The RBI will make its mid-quarter review on September 16th; the announcement of further rate changes are to be expected given the fact RBI has already lifted rates 11 times in 18 months.

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