Inflation: Think before you celebrate

Just because inflation wasn hysterical in January, doesn mean that hysteria should be ruled out by the stakeholders of the economy.
Thanks to the high base-effect and the capping of fuel and electricity prices, inflation slipped to 14.19 percent (year-on-year) last month, from the reading of 15.46 percent in December. In absence of the fuel/power tariff cap, however, Januarys inflation could have been easily higher by 80-100 basis points.
"Had the government not kept fuel prices unchanged, and had it been revising power tariffs as it was supposed to, the direct and indirect impact of both would have pushed Januarys year-on-year inflation between 15 and 15.5 percent," says Khurram Shehzad of InvestCap Securities.
Extrapolating this argument, if the fiscally constrained government keeps maintaining the cap on fuel and electricity prices and if the conditions that enable fuel and power tariff hike persist - both of which aren far-fetched assumptions - then the economy might be back to 2008.
At one end, both these prices will have to be raised substantially - and that too in a 2008-like shocking manner - at the other end, government borrowing needed to support such measures would also pump up the CPI.
Although, the government has promised to keep its borrowing from the central bank at September 2010 levels, it would be too simple to believe this promise in toto. Besides, the state of IMFs letter-of-comfort isn comfortable, whereas the possible economic aftermath of roadside killer Davis is also disturbing for those involved in government financing.
There are, of course, some factors that might keep the CPI from speeding this month. One is the nearly 1.5 percent decline in SPI inflation for the three weeks ending February 3, which implies that food inflation is perhaps tapering off. Second, is the high base-effect that began last month.
Yet, the likely easing of food inflation this month, and in the remaining part of FY11, doesn mean that it will hit single-digits anytime soon. In the meanwhile, as the central banks latest report pointed out, the rising pace of WPI inflation remains a source of concern, "since it is likely to push up the otherwise stable CPI non-food inflation".
But perhaps the biggest worry for consumers is that inflationary pressures are now more broad-based. "This is evident from the rising number of items registering double digit increases in both food and non-food groups in recent months".
Clearly, its never too much to fear inflation.