PMEAC raises inflation forecast to 6%

NEW DELHI: The recent spike in food prices has prompted the Prime Minister’s Economic Advisory Panel to revise its projections for overall inflation at the end of the 2010-11 financial year upward to 6%, against the earlier estimate of 5.5%. “I think the more recent numbers indicate a pressure on the food prices... My own estimate now is that perhaps by March, 2011, the wholesale price index inflation would be around 6%,” Prime Minister’s Economic Advisory Council (PMEAC) chairman C Rangarajan said. According to him, overall monthly inflation is likely to be around 7% in December, mainly due to high prices of essential commodities. “We had earlier expected that price rise would be around 6.5% by end of December. But that appears to be unlikely. Perhaps it is more likely to be around 7% by the end of December,” Mr Rangarajan said.

Food inflation surged to a ten-week high of 14.44% for the week ended December 18 as prices of vegetables — onions, in particular — besides fruits, cereals and protein- based products, continued to escalate. Overall, inflation in November stood at 7.48%, down from 8.58% in the previous month.

Asked whether the RBI should intervene at this stage to tame inflation, Mr Rangarajan said, “I think the RBI has still a few more weeks to watch the situation. If the inflation remains at this high level, then perhaps some action could be called for.”

He further said that if inflation doesn’t come down fast enough, then some action by the RBI is called for. Following high food prices in recent times, finance minister Pranab Mukherjee has said that overall inflation would moderate to around 6.5% by March-end, as against the 6% projection in the finance ministry’s Mid-Year Review.

In its latest review of the monetary policy, the RBI clearly stated that inflation remains its major concern, even though it refrained from hiking policy rates, as the system was facing a cash crunch. A tighter monetary policy has implications for growth, as credit needed for investment would be hard to come by and may hit the government’s attempts to put the economy on a 9%-plus growth path.