Run away prices

More unconventional territory lies ahead for RBI and the government, with headline inflation or the wholesale price index (WPI) for November touching a 14-month high of 7.53 per cent, led by rising costs of vegetables, non-food primary articles and energy.

Within the WPI, food inflation was at 19.9 per cent and prices of non-food articles accelerated 7.6 per cent. And, within food inflation, prices of vegetables rose 95.25 per cent in November as compared to 78.38 per cent in October. Prices of primary articles rose 15.9 per cent. Pressure will pile up on the government to rein in surging food prices as economic sloth has touched a decadal low, not to mention the agony of living up the drubbing it sustained in last week's elections to five states.

A key reason for high food inflation in the past few months is the government pushing in more money into the minimum support price regime without a concomitant increase in productivity. With the new crop coming to the market, vegetable prices have eased a bit, especially potato and onion -- the latter has halved to Rs 13-15 a kg. However, vegetable prices are still about 10-15 per cent higher than 14 months ago, and onion prices could be arrested as more supplies flow in and exports pick up. Consequently, the WPI could look much better in December, though food inflation is by no means a phenomenon which accurately reflects supply conditions. Hoarding by vegetable stockists is rampant and government officials are still helpless in choking the deviousness of the trade. While core inflation has held steady in November, it can be affected by the continuing passthrough of the depreciating rupee. Energy-related inflation has also picked up to 11.1 per cent from 10.3 per cent in October, while manufacturing goods inflation hovers at around 2.5 per cent.

As Milton Friedman said, inflation everywhere is a monetary phenomenon; though, its structural imbalances are exacerbated by poor agricultural productivity and changing food consumption patterns spurred by rising income levels. India’s structural reforms have not helped ease broader supply-side constraints, which adds to underlying inflationary pressures. These are key components of the inflation story which RBI will seek to rewrite, most likely through another hike. While higher food supplies can anchor WPI inflation in December and into March next year, the high CPI and steady core inflation numbers, and the outcome of any Fed tapering will require more than just pre-emptive tightening of RBI's monetary stance vis-a-vis interest rates.