Restricting inflationary expectations continues to be a challenge for the authorities. The monetary management is aiming to restrict year-on-year inflation in 06-07 within 5-5.5%. Inflationary pressures have been attributed mostly to primary food commodity prices. Due to preventive monetary and fiscal policy measures expected inflation has remained more or less stable. The immediate impact of cost-push-inflationary factors such as those of world oil prices has been contained to some extent, due to burden sharing strategies adopted by oil companies and duty reductions.

Headline inflation edged up to 5.2% in the week ended October 7, 2006. The average WPI inflation rate decreased slightly too and hit 4.5% as against 5.3% in a year ago.

Prices of primary food commodities especially those of wheat, pulses, fruits and milk exerted upward pressure on headline inflation during 06-07. (See Figure) (Chart 25, http://rbidocs.rbi.org.in/rdocs/Bulletin/PDFs/74237.pdf)

Prices of wheat and Pulses increased by as much as 18% and 43% respectively, reflecting increased demand and stagnant domestic production. Vegetable prices have increased about 57%n over end-March 2006.

Fuel prices exerted immense pressure until August 2006, despite lagged transfer of world prices to domestic prices. Fuel group inflation rose to a massive 9.9% percent, y-o-y in June 2006. The fuel group inflation rate dipped to 3.3% in September 2006 owing to base effects of high prices in September 2005. In October 2006 the increase in electricity prices pushed up fuel group inflation to 5.2%.

Manufactured product prices have remained largely stable with an inflation rate of 4.2 %. Industry experts say that competitive pressures, gains in productivity, and corporate profitability have helped the companies to absorb the higher input prices in their profit margins. Manufactured product price rise was led primarily by metals textiles and cement.

Consumer Price Inflation:

Consumer price inflation has been higher than WPI since November 2005, underlining the higher weight of food items in the CPI. Data from CPI-Industrial Workers (CPI-IW) August 2006 show that food group inflation increased from 3.1 per cent in August 2005 (y-o-y) to 10.0 per cent in June 2006 before dropping marginally to 8.3 per cent in August 2006 (y-o-y). This was mostly the result of higher prices of cereals and pulses which recorded increases of 10.7 per cent and 18.5 per cent, respectively, in August 2006. Higher prices of meat, fish and eggs, and vegetables and fruits also contributed to food group inflation. Prices of fuel and light increased by 8.6 per cent on a y-o-y basis in August 2006, as opposed to a fall of 6.6 percent a year ago. On the other hand, housing inflation -reflecting rents on housing - slowed down from 11.7 per cent in August 2005 to 6.8 per cent in August 2006.

In conclusion, primary articles' contribution to the overall y-o-y inflation increased to 32 per cent (from 17 per cent a year ago) mainly due to higher prices of wheat, pulses, milk and fruits. Manufactured products group's share was higher at 45 per cent (35 per cent), largely on account of an increase in prices of metals, cement and textiles. The contribution of fuel prices to the y-o-y headline inflation, however, fell to 23 per cent as on October 7, 2006 from 49 per cent a year ago.