Sharp drop in food inflation on base effect

Food inflation registered a drop of almost 400 basis points and stood at 12.92 per cent for the week ending June 19. In contrast,it stood at 16.9 per cent during the previous week. The sharp decline in the food price inflation is primarily due to the high base effect from last year and,therefore,does not indicate any softening in prices. As prices of essential items such as pulses,fruit and milk continue to remain high,expectations of a rate hike by the Reserve Bank before its monetary policy review on July 27,have risen.

The recent data does not factor in the fuel price hike announced by the government last week. According to experts,de-regulation of fuel prices will have an adverse impact on food prices and the cascading effect of diesel price hike is likely to further stoke food inflation. Economists do not expect food inflation to come to normalise and return to single-digit before September. Fuel inflation will go up,hiking the freight cost which in turn will put upward pressure on prices. Food inflation will come down to a low single-digit level only in the second half of the fiscal,8221; said DK Joshi,chief economist,Crisil.

The fuel price rises are expected to push up monthly price inflation by 0.9 percentage points,government officials have said,exacerbating headline inflation that stood at a surprisingly high 10.16 per cent in May. According to RBI8217;s projections,the headline inflation will ease to 5.5 per cent by March 2011,but Governor D Subbarao said last month it would revisit that forecast at its July review.

A report released by RBI expects inflationary pressures to loom for some more time and private credit demand is likely to be stronger.