Page last updated at 08:49 GMT, Friday, 13 June 2008 09:49 UK

Indian inflation at 7-year high

As prices rise, Indian consumers get less for their rupees

Indian inflation has risen at its fastest rate in seven years.

Wholesale price inflation rose 8.75% in the 12 months to 31 May, rising from the previous week's 8.24% and above analyst forecasts.

The inflation rate is now at its highest since February 2001 and well above the government's target of between 5% and 5.5%.

The rising cost of food and oil are pressuring prices and interest rates are expected to rise.

The central bank has already raised rates to combat inflation, lifting its key lending rate by 25 basis points to 8% this week, its first rise in a year.

Analysts fear inflation could exceed 9%, a 13-year high.

"With this kind of galloping inflation one cannot rule out the possibility of it touching double digits ... in coming months," said Rupa Rege Nitsure, chief economist at Bank of Baroda.

Political tension

Ministers recently raised petrol and diesel prices by about 10%, sparking fears about fuel affordability and resulting in social unrest.

India imports nearly 75% of its crude oil requirements but subsidises the cost of domestic fuel products to help contain inflation and protect the poor.

Oil prices are a sensitive political issue in India as even a small rise in the price of diesel can feed into much higher food and transport prices.

With the governing party is facing elections in a number of states this year, the Congress party-led federal government had been wary of increasing fuel prices for fear of antagonising voters.

But India's three state run-oil importing, refining and marketing companies have been losing huge sums of money as they have been unable to raise prices.

Energy costs make up 14.2% of the inflation index. In addition to fuel and food price rises, some analysts have forecast that transport and feedstock costs will rise within the next two to three months.

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