India inflation rate rises to 11%

Surging inflation is eating into consumers' spending power

Indian inflation has risen to a new 13-year high, hitting shares and weakening the rupee.

The wholesale price index rose to 11% in the 12 months to 7 June, up from the previous week's 8.75%. The inflation rate is now at its highest since 1995.

Rising fuel and food costs are pushing inflation well above the government's target of between 5% and 5.5%.

The jump took many analysts by surprise. More interest rate rises are now expected.

Unlike most countries, India calculates inflation on the wholesale price of a basket of 435 basic goods, which means actual prices paid by the consumer are much higher.

Cooking gas prices have risen by 20% and diesel is up 21%.

In Mumbai (Bombay), India's main Sensex index ended 516.70 points, or 3.4%, lower at 14,571.29.

Shares have slumped since the Sensex broke through the 21,000 level earlier this year.

Election

Indian Finance Minister Palaniappan Chidambaram admitted it was "a difficult time", and said the government would look at introducing measures to tackle the problems.

"Naturally we'll have to look at stronger measures on the demand side as well as the monetary side," he said.

Inflation is like a tax on the poor, but when it is driven by high food prices it's like a double tax because of the amount it makes up of their total expenditure Paranjoy Guha Thakurta, independent economic analyst

The BBC's Sanjoy Majumder in Delhi said the inflation numbers are piling pressure on the governing party, which is facing elections in a number of states this year.

Although a general election must be held by May 2009, our correspondent says there is some suggestion it may be held later this year.

With the central bank expected to increase interest rates to try to control inflation, India's economic growth is expected to slow down and combined with rising prices, this may translate into voter anger, our correspondent adds.

Rate rises

Last week, India's central bank raised short-term borrowing rates from 7.75% to 8%.

The unexpected rate increase was the first since March 2007.

The Reserve Bank of India is keen to address spiralling inflation.

But there are concerns that interest rate rises will not do anything to curb rising energy prices, which saw India recently cut fuel subsidies and raise petrol and diesel prices by about 10%.

This sparked protests in many parts of the country from consumers and transport operators.

India imports nearly 75% of its crude oil requirements, making it heavily reliant on the whims of international oil markets.

The government subsidises the cost of domestic fuel products, but even allowing prices to increase slightly can have a massive impact on the living standards of the majority of India's poor population.

Three out of four people in the country live on $2 a day.

Paranjoy Guha Thakurta, an independent economic and political analyst, told the BBC that inflation was "like a tax on the poor".

"But when it is driven by high food prices it's like a double tax because it many cases food costs account for half or more of the expenditure of those that live below the poverty line," he added.