New Delhi: Driven by easing prices of pulses, wheat and vegetable, food inflation dropped to an 18-month low at 7.47 percent for the week ended May 7, falling marginally from 7.7 percent in the previous week.

This is the third consecutive weekly fall in the food price index, a development described as "declining trend" by the government.

"Both on food inflation and overall Whole Price Index (WPI) there is a declining trend," Finance Minister Pranab Mukherjee told reporters here.

Mukherjee said inflation has come down in all three segments -- primary articles, food and non-food.

Food inflation, as measured by WPI, was 7.70 percent in the previous week. It was above 22 per cent in the first week of May 2010.

During the week under review, prices of pulses fell by 8.87 percent year-on-year, while vegetables and wheat also became cheaper by 3.61 percent and 0.06 percent, respectively.

Food inflation was in double-digits for most of 2010, before showing signs of moderation since March this year.

High core inflation a concern

Experts, however, cautioned that core (non-food) inflation still remained a matter of concern and could prompt the RBI to further raise interest rates.

"Pressure from core segment, specially manufacturing, remain and RBI's policy will be guided by this. We expect it to raise rates by 25 basis points at the next review on June 18," Standard Chartered Bank head of research Samiran Chakraborty said.

In April, the manufactured goods group index had risen by 6.18 percent on an annual basis. Manufactured items have the highest weight of 64.9 percent in the WPI.

Declining trend of inflation

Headline inflation in April had stood at 8.66 percent, down from over 9 percent in March.

The RBI has hiked its key policy rates nine times since March, 2010 to tame demand and curb inflationary pressure.

The inflation in overall primary articles during the week under review was 10.94 percent, down from 11.96 percent in the previous week.

In the non-food primary articles segment, the inflation numbers fell to 23.82 percent from 28.62 percent during the week ended April 30.

Fuel hike to affect inflation

With global crude prices remaining at over USD 100 per barrel, on account of the political unrest in Middle East and North Africa, state-run firms hiked petrol prices by over Rs 5 a litre last week.

Hikes are also expected in prices of diesel and LPG, the two fuels which currently remain regulated.

The impact of the hikes is going to be reflected in the headline inflation numbers for May which are to be released next month.

"It looks like food inflation is on its way to further moderation. However, high core inflation may neutralise the overall effect. Pressure on headline inflation will remain," Crisil chief economist D K Joshi said.

Overall inflation to be high

In its monetary policy for 2011-12 released earlier this month, the Reserve Bank said that in near future inflationary pressure would be more from core (non-food) items on account
of high global prices of commodities, particularly crude.

It also said that overall inflation would remain high in the near future, averaging 9 percent during the first half of the fiscal, before moderating to around 6 percent by the year-end.

Joshi said RBI is likely to hike its policy rates by further 25 basis points at the next review on June 16.

"Besides, some concern areas remain like that of milk and protein-based items in the food segment also," he said.

RBI Governor D Subbarao said earlier this week that inflation remains still high and must be brought down even if that hurts economic growth in the short term.

Similar view had been echoed by Chief Economic Advisor Kaushik Basu.

Food items remain costly

During the week under review, prices of other food items continued to remain expensive.

Fruits were dearer by over 30 percent on an annual basis, while eggs, meat and fish were up by 5.67 percent. Milk prices were also dearer by 4.56 percent.

Cereals became 4.79 percent more expensive, while onion prices were up 10.53 percent.

Meanwhile, in the non-food primary articles segment, fibres became dearer by almost 62 percent, while minerals were up 11.95 percent. Fuel and power became 12.11 percent costlier year-on-year.