Much of the attention in the debate on inflation has understandably centred around galloping food prices. But since this is a supply side problem, it isn’t the best guide for monetary policy which needs to focus on aggregate demand. Here, it is useful to consider what is happening to prices elsewhere—cement and steel prices are a particularly good indicator of judging aggregate demand pressures. Cement prices are indeed inching up in the wholesale price index-based inflation as consumption has grown by about 12% in the last six months. The industry is growing at 7-8% and has a current capacity of 240 million tonnes, which is expected to be around 285 million by the end of March 2011. All the major cement companies have hiked prices by Rs 5 to 10 for a 50-kg bag. Cement prices have risen moderately as demand from states like Punjab, Haryana, Madhya Pradesh and Orissa is picking up because of rural housing and government infrastructure projects, which were announced as a part of the stimulus packages and which have to be completed before March end. Despite the stimulus, there isn’t any evidence of a steep price rise in cement thus far.
For steel—a key input for infrastructure, auto and heavy machinery—prices are only likely to look up from January next year—currently they are around 60% of the peak level of June 2008. In fact, SK Roongta, chairman, SAIL, in an interview with FE on Monday, has said that an imminent price hike of the metal early next year would be an indicator of early recovery in the steel industry. The overall demand for steel next year is expected to be back at the 2006-07 levels and the third quarter results of steel companies are expected to be better on the back of a low base effect. Coupled with a demand push from the automobile and consumer durable sectors in the domestic market and increase in raw material costs, some producers have already made price adjustments and others are in the process of doing it. Again, despite these adjustments, there is no significant rise in steel prices so far. So, the price trends from these two sectors, better indicators of aggregate demand than food prices, do not raise any cause for immediate concern. Interestingly, the last bout of high inflation, in the summer of 2008, was driven by the high prices of steel, cement, metals and oil....