Inflation: Calm before the storm - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

Inflation: Calm before the storm

Oct 4, 2007

After being the basis for drastic increases in the Cash Reserve Ratio (CRR) for banks, the Indian Wholesale Price Index (WPI) seems content to stay below 4% for the present. And we surmise that it will stay there for a few more weeks. But as the popular proverb has proven in the past, still waters run deep. Scratch below the surface, and we see turmoil. Turmoil as prices of basic necessities take center stage yet again this year, not just in India but across the world. As the dollar weakens against all currencies in the world, the commodities are in demand as they act as a natural hedge in times of crises in the value of the dollar. Thus, world crude prices are shooting higher every week. Gold leads the pack of most other commodity prices that too have risen in tandem. The crude prices reflect supply issues as well: with most of the world's economies going into overdrive in the last couple of years, they have been on the upward trend. India's highly cross-subsidised oil industry has been gamely holding the fort - they shell out more for imports but get the same in return from the buyers as the political will to increase domestic petroleum product prices is lacking. However, a stronger Rupee reduces their import cost significantly.

Significantly, product prices in the developed world have not kept pace with crude prices as yet. The international prices for diesel and petrol have increased by less than 80 basis points in the first six months of FY08. Thus the rationale for a domestic price hike might not be such a big bogey going forward.

Fuels expenses
What are more worrying are the flatter production curves in coal, steel, cement in FY08. This will mean higher prices for these basic goods in the coming few months. And as they form the basis for a whole host of end products, prices of transport and manufactured items are also likely to follow. This will further feed the inflationary spiral.

Among the plethora of the Consumer Price Indices (CPIs) India has, the one that gives greater weightage to transport and communication, is the one for urban non-manual labourers (UNME, i.e. white collared workers, mostly working in service industry that today accounts for 60% of the nation's GDP). Their transport costs have doubled in the last six years.

The price rise in fuel and lights and housing has averaged 5.3% annually. It is a proven fact that the price paid by extensive users of electricity in India, is among the highest in the world. As wages try to keep pace with increased costs on these necessities, staff costs for companies go up across the board. And this can be seen in the aggregated quarterly results of Indian companies. This sets the stage for wage price inflation.

Thus India is in an unenviable position of fielding two issues at the same time - the basic commodity inflation, and secondly as this commodity inflation has remained unchecked, there also is a wage price inflation looming.

A good crop will help
It is the prices of agricultural commodities like sugar, cotton, and oilseeds that have been reducing thanks to bumper crops last season, and more expected at the end of this kharif (summer) harvests. It is the foodgrains, fruits and vegetables in the consumption basket that hold the key. The world food grain production is expected to grow by 4.8% in FY08. If the Indian harvests also keep pace, the inflationary tendencies can be kept at abeyance.

Preliminary findings of a committee having Dr C Rangarajan on board, show almost 50% of India's population yet depend on agriculture for a livelihood. The prayers for a good crop thus intensify!

Equitymaster requests your view! Post a comment on "Inflation: Calm before the storm". Click here!

  

More Views on News

Ride the Indian Real Estate Revival with this 'Different' Smallcap Stock (Profit Hunter)

Mar 23, 2021

Affordability in the housing segment has never been so good in last one and a half decade. Here's how you could make the most of it...

My Latest Stock Recommendation (Fast Profits Daily)

Oct 9, 2020

How I picked an exciting stock using trends from both the commodity and equity markets.

Data is the New Oil but It's Also the New Sugar. Here's How to Fight it (Profit Hunter)

Jun 1, 2020

Is too much data hurting your quest for market beating returns?

Quantum Mutual Fund: Hum woh nahi hain (The Honest Truth)

Apr 29, 2020

Ajit Dayal on how the mutual fund industry robs you of your wealth.

This One Trigger Could Turnaround Yes Bank's Stock Price (The 5 Minute Wrapup)

Oct 16, 2019

If Yes Bank manages to do this, it could be the start of a much-needed turnaround for the bank.

More Views on News

Most Popular

Hotel Stocks Will Reward Investors (Fast Profits Daily)

Jun 8, 2021

This is why I'm bullish on the hotel and hospitality sector.

My 'Unlock' Investments (Fast Profits Daily)

Jun 11, 2021

The best unlock investments you can make in the market.

The Most Visible Sign of India's Revival is on Two Wheels (Profit Hunter)

Jun 9, 2021

Investing in the best stocks could result in wealth compounding on a massive scale.

How I Discovered a 400-Year-Old Open Secret to Extreme Wealth (Profit Hunter)

Jun 11, 2021

Charlie Munger's open secret about investing success.

More

India's #1 Trader
Reveals His Secrets

Secret To Increasing Your Trading Profits Today
Get this Special Report,
The Secret to Increasing Your Trading Profits Today, Now!
We will never sell or rent your email id.
Please read our Terms

MARKET STATS