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Surge in inflation attributed to ‘base year’ effect

Special Correspondent

No promise of respite from price increase till November third week
Supply & demand govern vegetable, milk prices

NEW DELHI: The government on Friday expressed concern over the ongoing surge in inflation, but gave no assurance of respite from the runaway increase in prices till about the third week of November owing to the “base year” effect prevailing now.

In a statement here, the Finance Ministry sought to “place the matter [inflation and base year effect] in perspective” without “underplaying the seriousness of the concern” and said: “Headline inflation continues to be a matter of concern ... The point to be stressed is that the inflation rate for each group [in the Wholesale Price Index] is measured on an annual point-to-point basis. Hence, it is largely influenced by the trend in the corresponding week of the previous year, which is the base year”.

The base year effect pertains to inflation in the year ago period, wherein if the rate of price rise has been too low, even a small rise in the WPI now will arithmetically lead to a huge increase by way of inflation numbers.

While the headline inflation — as measured by the WPI — surged from 12.44 to 12.63 per cent for the week ended August 9 this year, it fell from 4.39 to 4.24 per cent the same week a year ago. “This trend of a declining WPI continued up to November 24, 2007.”

Consequently, even a small movement in the index in the current year is impacted by the “base” and the WPI for the group as well as the WPI for all commodities shows a rise, thereby indicating that the rising trend in WPI inflation may continue till October-November this year, as the index declined up to November 24 last year.

While listing the steps taken in the recent months to tackle demand-supply mismatches in wheat, sugar and edible oils, the statement said the prices of fruits, vegetables, milk and tea were largely governed by localised supply-demand factors, seasonal elements and disruptions such as rain.“It is the movement of prices of these items that is impacting the prices of primary articles.”

Ministry sources sought to explain that the prices of vegetables had not increased so much on a year-on-year basis, but since prices were often compared with the immediate past, the rise seemed much higher.

As for edible oils, however, the price movements were considerable. Even on a year-on-year basis, “the prices rose by 15 per cent as there was a hardening of prices globally, since more than 60 per cent of demand is met through imports,” the statement said.

Some of the supply-side measures expected to work in the short-term are the recent approval of open market sales of up to 60 lakh tonnes of wheat, release of an additional five lakh tonnes of non-levy sugar for August and September and the introduction of a scheme for supply of edible oils at a subsidy of Rs 15 a kg. The government is also examining a scheme for supply of four lakh tonnes of pulses at a subsidy of Rs 10 a kg.

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