8/10/04, INDIA, (Oilmandi) - Inflation is back in the news. But it is tooearly to hit the panic button yet. At 7.5% for the week ended July 24, therate is higher than what we have been used to. A rise in food prices and aspike in the price of iron ore have been this week’s main culprits.

But there is a statistical illusion to be taken into account as well. Theindex for all commodities remained between 173 and 174 during April-August2003, before beginning a gradual rise all the way to 179.7 by March 2004.

What this means is that the base for calculation of point-to-pointinflation during April-August this year would be virtually the same, evenwhen the index this year registered a gradual rise week after week.

This would mean that inflation would keep going up till September, fromwhich point onwards, the rise in the base will reduce the gap between thelevels of the index at corresponding points this year and last.

But this does not mean that everything is hunky dory, apart from thestatistical illusion. Global commodity prices are high and rising, and ourimport duties have not moved down enough to neutralise the impact.

This applies especially to steel and the petroleum sector, rise in whoseprices would feed into prices across the economy. Money supply last yeargrew faster than targeted, both the broad and narrow measures.

Domestic food stocks are just 20% higher than the buffer stocking norm forthis season. Delayed rains would take its toll on food and oilseed crops.There is a case for the government to move on several fronts to hold theprice line. Lower import duties for steel, petroleum and foodgrains arevery much in order.

There is a silver lining to this cloud as well. Higher inflation allowsreal interest rates to come down so long as the rise in prices is higherthan the rise in interest rates. This would remove the pressure on thegovernment to lower the nominal rate of return on provident funds andother small saving rates.

Higher prices, in the short run, boost corporate bottom lines and taxrevenues. The government can be pardoned if it seeks, in the short term,only to rein in inflation, and not to kill the beast.