If the monetary policy tightening initiated by the RBI since early last year was aimed at limiting the spread of input cost pressures to the broader economy, the measures seem to have been less than adequate. After a brief hiatus late last year, when the contribution of manufactured products to the overall headline inflation dipped from levels in the earlier months, the trend has reversed sharply. Since the beginning of this year, the contribution of manufactured non-food items to overall inflation has risen perceptibly. This surge in the manufactured non-food inflation, or core inflation, effectively signals the cascading of input cost pressures despite frantic attempts by the central bank to cool down prices by way of the 12 repo rate hikes since March last year. According to RBI data, while inflation remained high throughout, the underlying drivers changed during three distinct phases in the year. The changing inflation dynamics during 2010-11 was evident from changes in the weighted contribution to the overall WPI over three distinct phases. During the April-July 2010 period, the increase in WPI was quite significant and was largely driven by high food prices. In the second phase between August and November 2010, the magnitude of price rise was moderate but primary non-food articles witnessed strong price pressures even as the contribution of non-food manufactured products came down. During the third phase between December 2010 and July 2011, inflationary pressures rebounded strongly, driven largely by resurgent price pressures in the non-food manufactured products group, indicating a generalisation of price pressures. Though the headline inflation tells people the rate at which prices are currently rising, it is said to have a limited role in forming inflation expectations. Core inflation, or the long-term rate, carries considerable significance as a more accurate predictor of the future inflation rate. Rising core inflation thereby spells more bad news for policy makers.
HBL
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