The worst fears have come true. Food price inflation has indeed started to spill

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over into the manufacturing sector, as latest data on inflation indicate.

Inflation for manufacturing products rose by 7.4 per cent in February, reflecting increases in the prices of steel, cement, beverages, manufactured food items, cotton, manmade textiles, rubber and plastic goods.

As a result, overall inflation rose to 9.89 per cent in February, perilously close to 10 per cent and raising the spectre of further pressure on prices of commodities, goods and services. In January, overall inflation was 8.56 per cent.

The near-double-digit inflation also sparked speculation on whether now was the time for the Reserve Bank of India to signal higher interest rates.

“The sharp increase in inflation in manufactured products has been on account of a spillover from food price inflation. One has definitely seen an upward pressure on products such as chemicals,” said Anubhuti Sahay, an economist at Standard Chartered Bank.

Carmakers are worried about the fallout of higher interest rates that could result from rising inflation.

“Higher inflation levels lead to hikes in interest rates, which is worrisome for automakers as 70 per cent of cars are bought on loans,” said Honda Siel’s marketing vice-president, Jnaneswar Sen.

The government revised the December inflation upward to 8.10 per cent from 7.31 per cent. Economists said that this indicated that the nation could already be in double-digit inflation, though the February figure just stopped short of that.

One piece of good news is that food price inflation has stabilised. But what causes concern is manufacturing and fuel. The fuel price index rose 10.2 per cent year on year due to higher coal prices and the post-budget revision of petrol and diesel rates.

“From the 9.89 per cent overall inflation in February, one can more or less picture a scenario of a 10 per cent plus headline figure in March,” said Sahay.

Sahay noted that the revision in December inflation gave room for assumption that the economy was already experiencing a 10 per cent plus inflation.

The chief economist of Bank of Baroda, Rupa Rege Nitsure said, “While industrial growth is still lopsided, the pricing power (upward swing in prices) certainly must have returned to sectors that are growing at an accelerated pace.”

Experts said that inflation in the fuel, power, light and lubricant groups would start to ease out.

“In the coming months, the inflationary impact from energy will stabilise. There is a slight impact of the hike in petrol and diesel prices after the budget. This is reflected in the latest inflation,” said Amar Singh, commodity research head at Angel Broking.

Sahay forecast a policy rate hike of 25 basis points. But Citibank in a report authored by Rohini Malkani and Anushka Shah projected a 125-basis point increase in policy rates in 2010. It said the first increase would come in April.

(With inputs from Saahil Anant and Siddhartha P Saikia)