Fuel costs push India's inflation rate to 13-year high

India's inflation has risen to new heights as official figures yesterday revealed that increased fuel prices have pushed up the costs of food, building supplies and steel.

The new figure of 11.63 per cent recorded during the third week of June is the highest for 13 years, and almost a threefold increase from last summer's rate of 4.3 per cent.

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Analysts had predicted that the rate would be close to this level, as the prices of cooking oil, fruit, tea, vegetables and other staples have jumped as a result of the increased fuel costs. This week, thousands of lorry drivers across India held a one-day strike in protest at a rise in diesel costs.

Economists have estimated that growth in Asia's third-largest economy will slow this year as a result of challenging global fin-ancial conditions. The Prime Minister, Manmohan Singh, has projected growth at around 8 per cent for the coming year. Inflation, meanwhile, has been at alarmingly high levels since the first week of June, when it rose sharply from 8.75 per cent to 11 per cent.

This week, the governor of India's central bank, Yaga Venugopal Reddy, confronted with the highest inflation rate since 1995, said: "The most urgent and short-term priority for central bankers at the current juncture seems to be to calm the nerves about inflation or to anchor inflation expectations, with an implicit recognition that a somewhat elevated headline inflation in the short-term may be difficult to avoid."

In the shorter term, it is likely that the bank will proceed with another rise in interest rates. All eyes will be on the central bank, the Reserve Bank of India (RBI), when it next meets on 29 July. It has already raised key lending rates twice in the last month.

But the soaring inflation also has major political implications, and could influence the timing of the next general election. Already under pressure from its leftist allies over the US-India nuclear deal, the Congress Party-led coalition government is battling to avoid an election this year while public frustration over rising food costs remains so high.

While India has not been able to escape the rising cost of crude oil – the government passed on recent rises to consumers last month – Mr Reddy said the country had largely avoided the global financial fallout from the sub-prime crisis in the US. He said this was partly because its credit derivative market was in its infancy, its financial distribution model not comparable with advanced economies, and because of curbs on local investors buying financial products issued overseas.

However, inflation is now an increasing threat across Asia, with China also hitting new price rise highs in recent weeks, while in the Philippines, inflation is running at 11.4 per cent, the highest rate for five years.