Finally, inflation has hit the roof at 7 per cent. Concerns are on a high as it has taken the economy hardly two months to be transformed from a situation where the Government was taking credit for a rate of under 4 per cent to the current state, when it has hit 7 per cent. It has certainly taken everyone by surprise. According to HDFC Bank chief economist Abheek Barua, “We were expecting a much lower rate and like the rest of the market, we were caught unaware.” The previous week, when inflation hit the 6.68 per cent level, it prompted an emergency Cabinet meeting, where the Government took some important fiscal measures like reducing the duty on edible oils and other commodities so as to ease the price pressure. While the pressure of rising inflation retains the momentum that began eight weeks back, several questions immediately come to mind — what are the driving factors, how come no one could predict it coming, where is it headed, how will it impact the growth rate and are there measures that can be taken to bring it under control?

As far as the factors responsible are concerned, it is very clear that this time around it is global commodity prices that are governing the northward WPI movement.

Crisil director and principal economist D K Joshi opined, “The global scenario is very tight, especially from the food grains point of view. Oil and wheat prices have shot up significantly.” Metals too have made a major contribution. “The key reason is the sudden spurt in iron and steel prices over two weeks — those beginning on March 8 and 15. This was perhaps due to a compression in the revision of prices to these two weeks.”

... contd.