High inflation? Blame it on small cities

Falling food prices notwithstanding, consumer inflation will remain high during the current fiscal because of high cost of housing and services as well as the increasing inflationary pressures from smaller cities, Goldman Sachs said in a report on Tuesday.

Goldman's research arm said in a report that inflation, based on consumer price index for industrial workers (CPI-IW) that includes services and housing costs, is already running at double-digits across almost all cities and has picked up rapidly in the smaller ones.

The report further pointed out that since last June housing costs have risen to an estimated 16 per cent now from 4 per cent at the end of 2008.

"We expect inflation to remain high and sticky through the year. . . even as the winter crops hit the market and ease food prices," Goldman said, adding, "our city-by-city analysis of inflation shows that smaller cities are contributing more to inflation that the main metros."

Goldman said it divided cities into large (with population over 5 million) and small (1-5 million) categories for its analysis, and found higher inflation in small cities because of broadbased recovery from the global economic crisis of the past 18-odd months. Besides, it added, the strong recovery and growth momentum in smaller cities showed their rising importance as "activity hubs" as the country continues to grow at a faster clip.

Goldman said, however, that to tame inflation, the Reserve Bank is expected to tighten the monetary policy (borrowing and lending rates) further. "We continue to think the RBI will deliver a total of 150 bps (1 per cent equals 100 basis points) of policy rate hikes in 2010, of which 50 bps has already been delivered. We expect a further 100 bps in rate hikes for the rest of the year," Goldman said.