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Economy Feb 12, 2013

Double digits is bad, but vegetable inflation is the shocker

By Rajesh Pandathil

Consumer price inflation for January accelerated to 10.78 percent from 10.56 percent in December, the government's data today showed today.

If the data is giving you a shock, hold. This might just be the beginning. A closer look at the price data released by the government makes clear that the worst for the aam aadmi is yet to come.

Among the food and beverages categories, the only ones that have a single digit inflation rates are milk and products, condiments and spices, fruits and non-alcoholic beverages.

Apart from this, another major category that has a single-digit print is fuel and light. And this is where the catch is.

In this photograph taken on February 16, 2011, an Indian vendor sells vegetables on a street in New Delhi. Reuters

In this photograph taken on February 16, 2011, an Indian vendor sells vegetables on a street in New Delhi. Reuters

The single-digit inflation rate of 8.51 percent in this category comes before the government's moves on diesel prices. Once these take effect, the inflation here will witness a sharp acceleration.

The government, as part of its initiative to rein in fiscal deficit, has put in place a mechanism that allows the oil companies to increase the diesel prices in a phased manner over the next few months.

More importantly, it completely deregulated the diesel prices for bulk buyers.

The railway, one of the key bulk buyers, has increased the passenger fares before its budget on 26 February. Though the railway minister has ruled out further fare increases in the budget, it is expected raise the freight rates.

The increase in freight rates will have a cascading effect on many other commodities. So a price increase across commodities is in the offing.

A bigger shock is vegetable prices, which usually trend downward during winter and upward in summer.

The inflation rate in this category is already 26.11 percent in January, despite being the winter season. So in the coming summer, expect vegetables to drill a bigger hole in your pockets. Similar is the case with milk and fruits.

The phased increase in diesel prices will push up the prices for more than one year.

Adding to the worries is the election extravaganza. Axis Bank expects a $13 billion unintentional stimulus to the economy as 13 state assembly elections are slated this year.

According to the report, various political parties and the government are likely to splurge huge amounts-most of it in black-during the coming months to appease the voters.

Usually, in a pre-election year the inflation rate in the economy rises by 150 basis points, the report said.

The bottomline: do not expect a respite from the price increases in the near future.

by Rajesh Pandathil

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