i Develop Stocks Advisory

Inflation may top 10% on oil price hike Wednesday, June 04, 2008 A fuel price hike could push up inflation into double-digit zone. At $125 a barrel, the price of the Indian basket of crude oil has more than doubled from the levels a year-ago. Prices of petrol and diesel, on the other hand, have seen a very modest jump of about 3-5 % during the same period. The disproportionate increase in fuel prices vis-a-vis can be attributed to the government’s attempt to curb inflationary trend in the economy that grew at 9% in FY 2008. Inflation at 8.1% during the week ended 17 May 2008 has already touched a four-year high. Hike in prices of petrol and diesel is likely to take place anytime soon. Inflation is likely to be 10-10 .5% after petroleum price hike (assuming that kerosene and LPG cylinder prices will be left untouched). In the recent past, whenever there was a hike in prices of diesel and petrol, wholesale price index (WPI) and price index for fuel products jumped substantially in the same week and in subsequent weeks. Historical trend suggests that a hike of Rs 2 a litre for petrol and Rs 1 per litre in case of diesel pushes up the WPI more than a point in subsequent two weeks. If we assume the trend is likely to repeat this time as well, WPI will touch a level of 233-233 .5 by the third week of June 08 if the hike happens this week itself. This translates into an inflation rate of 10%. If the hike is more to the extent of Rs 5 in petrol and Rs 2 in diesel, then inflation might even touch 10.5%.