Inflation- Where are we headed?

On Thursday ( every Thursday) Inflation numbers for the week is published and this is closely watched by all because it hurts the “aam admi” and is also a key number that the Reserve Bank of India ( RBI) tracks closely since it is linked to their monetary policy.

So where are we headed. We are at presently an inflation of 9.8% much higher than the 8.5% maximum target that the RBI had taken for itself. However the biggest driver for inflation is the increase in the food inflation which is presently running at 16.3% and the fuel inflation is at 12%.

There are a couple of factors which need to be looked at when trying to predict inflation

Factors leading to lower inflation

1. Base effect: Since the base of prices is so high ,so even if prices remain the same, then inflation will be at zero – this is the reason why in the first half of 2009 , we had almost reached zero % inflation and people were getting into a frenzy thinking we are getting into a deflation scenario

2. Food inflation: has started coming down—cost of food has stabilized and the expectations are of a better year in food production vs 2009. This will help bring down food inflation and hence is a positive driver to lower inflation

3. RBI Monetary Policy: RBI recently had raised the CRR by 0.75% and hence is sucking out liquidity from the system. Hence there is lesser money chasing the same amount of product and hence will lead to lower prices in the market. This will help control inflation. In fact it is expected that in the next credit review in April, the RBI may further increase rates.



Factors leading to higher inflation

1. Increase in fuel prices: The Government has already increased fuel prices some time ago. This has increased the fuel inflation ( inflation because of fuel prices) . This is at present negating the effect of lower food inflation on the overall inflation number. If you look at the prices of crude oil over the last few weeks- they are consistently on the move up- presently hovering around 82$. So if the prices of oil goes up, the government either has to subsidize prices or increase fuel prices once again—so a –ve factor on Inflation

2. Commodity prices: With growth comes increased commodity prices. Already iron ore prices seem to be on the way up , steel prices are being increased—and all of these things will lead to increased prices of products for infrastructure and hence increased inflation

So where are we headed?

My guess is that the forces forcing the inflation % down are stronger than the forces pulling it up – especially the base effect and hence inflation is on its way down over the next three to four months.

We will regroup on this topic after a few months…

Happy investing

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