Inflation jumps on higher crude oil prices

Inflation jumps on higher crude oil prices
AGENCIES

NEW DELHI, MARCH 26: Higher crude oil prices have driven inflation to its highest level since last June, and analysts said on Sunday it could rise further in coming weeks.

Provisional data released by the government showed year-on-year inflation as measured by the wholesale price index (WPI) jumped to 3.50 per cent for the week ended March 11 from 2.74 per cent in the previous week.

It was the index's highest level since June 5, when it was 3.53 per cent.

"It is mainly crude oil prices which have driven up inflation in recent weeks," Saumitra Chaudhuri, economic advisor at Investment Information and Credit Rating Agency, told Reuters.

Analysts said the government's hike in prices of kerosene and liquefied petroleum gas (LPG) last week, to reflect rising global oil prices and trim an unsustainable oil product subsidy, was also likely to put upward pressure on the index.

Global crude prices are currently at nine-year highs and this has particular relevance to India which imports a large part of its requirements.

"The LPG and kerosene hikes will not have a ripple effect like say an increase in petrol or diesel prices which would push up transport costs and affect the economy as a whole," said Vasan Shridharan, treasury economist at Standard Chartered Bank.

"But they do constitute a part of the index and to that extent will have an impact," he said. India fixes the prices of key petroleum products such as LPG and kerosene at a low level to help the poor. This is funded by taxes on petrol and aviation fuel.

India's crude and oil products imports are estimated to increase by 7.5 per cent to 72 million tonnes in 2000/01 (April-March) while demand is forecast to rise to 104 million tonnes from 98 million in 1999/2000, according to media reports.

The index for the manufactured products group rose by just 0.1 per cent and that for fuel, power light and lubricants by 0.3 per cent during the week ended March 11.

But the primary articles group, which has a weightage of around 32 per cent in the WPI, showed a much steeper rise. The index for the group rose 1.5 per cent, driven primarily by a 25 per cent increase in the prices of imported petroleum crude, the government data showed.

"Although there has been a fall in prices of cereals, its impact on the index has been offset by the rise in crude oil and energy prices," Chaudhuri said.

Analysts warned that fresh upward pressure on the inflation rate could be expected from a five per cent hike in freight rates on all but a few essential commodities announced last month in the railways budget for 2000/01.

"I expect the impact from the railway freight hike to be felt in subsequent weeks...the latest data probably does not reflect this fully," Chaudhuri said. However, Chaudhuri did not expect inflation to rise very sharply in the coming weeks.

"There has been a structural change...earlier inflation for manufactured products used to be the key driver, now-a-days this has become very stable thanks to excess capacities built up in the late 1990s and competition from imports," he said.

"We should probably see the overall WPI rate rise to about 4.5 per cent or so at the most," he said.