Inflation measured by wholesale rates vaulted to more than a year's high 7.31 per cent in December on higher food prices, mainly sugar, pulses and potato, adding to the government's worries about price rise.
The December numbers beat the Reserve Bank of India's forecast that inflation would reach 6.5 per cent-level only by this fiscal end and research firm Dun and Bradstreet's 6.31 per cent. Inflation was earlier above this level in November 2008 (8 per cent).
In November 2009, inflation was 4.78 per cent. The intensity of food inflation could be gauged from the fact that prices of processed food items rose at the rate of 26.40 per cent in December, and non-processed food items turned expensive by 19.17 per cent.
However, respite came for the government by way of lower food inflation, measured for the week ending January 2.
It eased a bit to 17.28 per cent from 18.22 per cent a week ago. Struggling to put the lid on inflation, the government on Wednesday announced freeing white sugar imports from duty till December, eased raw sugar processing norms and announced plans to 2-3 million tonnes foodgrain in the open market.
Sugar prices rose 53.98 per cent in December. Sugar in the retail market is selling at nearly Rs 50 a kg. Potato prices too have more than doubled, while pulses were costlier by over 40 per cent from year-ago level.
Overall vegetable and cereal prices were up nearly 40 and 13 per cent. "Inflation is likely to touch 8.5 per cent by March this year," said Standard Chartered Bank Economist Anubhuti Sahay.
Economists predict continually high food inflation could spread to other items as well. "Food inflation is spilling over to other areas. I expect overall inflation to reach 8.5 per cent by March-end," said HDFC Bank Economist Jyotinder Kaur.
The RBI has projected inflation at 6.5 per cent by this fiscal end. Sahay said there could be some spike in prices of commodities like steel and cement even though for December both these prices had declined.
With the rising trend in food prices rubbing off on other commodities as well, RBI is expected to squeeze money supply in its January 29 monetary review to tame inflationary expectations.
"I expect RBI to hike cash reserve ratio (cash requirement of banks) by 50 basis points. The central bank could also raise repo and reverse repo rates (short term rates) by 25 basis points each," Crisil Principal Economist D K Joshi said.
The government is yet to take a decision on freeing petrol prices, which could lead to rise in petrol prices by around Rs 3 a litre.
For December, petrol prices declined by over two per cent. However, food inflation eased a bit during the week ended January 2, but pulses, potatoes and onions among other essential commodities remained expensive.
Despite food inflation moderating a wee bit, potatoes rose over 70 per cent during the week ended January two, onions and pulses over 45 per cent each and cereals by over 14 per cent.
"Week-on-week it (food inflation) is down, which is a very good (sign). There are a whole lot of measures that are going through that have been decided on," Chief Economic Advisor Kaushik Basu said.
Earlier, Planning Commission Deputy Chairman Montek Singh Ahluwalia had also said that food inflation would ease next month as fear of negative impact of poor monsoon on farm produce has eased.
To increase the availability of sugar, the government had on Wednesday relaxed the norms for processing of raw sugar and allowed duty-free import of white sugar till December-end.
A host of decisions, including selling of 2-3 million tonnes of wheat and rice in the open market over the next two months and asking state-owned trading firms to intensify import of pulses, was taken at a meeting of the Cabinet Committee on Prices chaired by Prime Minister Manmohan Singh.
Food and Agriculture Minister Sharad Pawar had said that the Prime Minister would convene a Chief Ministers' meeting in the last week of this month to discuss price situation and take stern action against hoarders. These steps, he had said, "would definitely impact the price situation... Prices would come down in 4 to 8 days."
