The headline inflation rate for the week of July 5 released last Thursday printed at 11.91 per cent, a little over the 11.89 per cent of the previous week. The median forecast from financial market economists was 12.05 per cent. This prompted the finance minister to claim that inflation is stabilising.

The prognosis might turn out to be a trifle too optimistic. There are a number of risks lurking around the corner that threaten to take inflation up in the months ahead. Thus, I shall not be surprised if by September the inflation rate climbs well over 13 per cent. For one, the much-discussed "base effect" turns adverse post July and is likely to pull the inflation rate up.

• Inflation, the silent killer

What it means is that inflation rates were exceptionally low in these months last year. Since inflation in India is measured year on year - that is by dividing the current price level by the level in the same week last year, an exceptionally low "base" level is likely to jack the current year's inflation rate up.

Apart from this purely statistical effect, there are more "real" drivers that are likely to be at play going forward. Going by the data released by the Met office, the monsoon seems to have been far from adequate in Gujarat, Maharashtra and Andhra Pradesh.

This is likely to affect crops like cotton, oilseeds and pulses. Commodity traders from the region tell me that the impact is already palpable and will drive prices up.

Oilseeds and edible oils incidentally have been a key contributor to the build-up in inflation over the last few months and a further uptick in prices cannot but be bad news. Fortunately, the monsoon seems to have been kinder to the North and East and some moderation in rice prices could provide some offset.

The "self-imposed" moratorium on steel prices by local steel manufacturers lifts soon. Input costs like iron ore have hardened over the past few months and there is a large gap between local and international prices. If steel producers are allowed to bridge this gap, this "catch up" with global prices could drive inflation up.

• Inflation, the silent killer

The problem of incomplete data capture has, in the recent past, driven nasty surprises in inflation. Price changes on the ground are often not captured in the index on time and this often creates a large "backlog" of revision that is often done in one shot.

This leads to sharp spikes in inflation and sudden, unanticipated jumps in the price level. We saw this problem with iron and steel prices, which had been going up since the last quarter of 2007 but started getting reflected in the wholesale price index only in March. Inflation graphs thus show a step-jump in March.

Analysis by a number of research houses shows that hefty upward revisions in the indices for cement, electricity and fertilisers are due. As they find their way into the index, a jump in inflation seems inevitable.

The joker in the pack remains oil prices. While moderation in global prices might not have an immediate impact on local prices, there is little doubt that the near-term dynamic of global inflation is inextricably linked to crude oil prices. If crude prices drop sharply, so will other commodities. This will rub off on Indian inflation.

• Inflation, the silent killer

I am writing this column at a time when oil prices have skidded from a peak of over $145 to $130 a barrel over a matter of days. Much as I would like to predict the beginning of a sustained decline, the fact that I have been proved wrong at least half a dozen times over the last year has made me somewhat cautious.

Let me explain. I am squarely in the camp that believes that oil prices are grossly overheated and are way higher than what the balance of demand and supply in the oil market would imply.

However, over the last few months I have seen them gain in their role as a hedge against the vagaries of the US financial sector and the dollar. In short, investors have dumped dollar assets and bought oil futures instead.

Thus, a permanent succour in oil markets could come from one of two things. If the anxieties about the US financial sector wane, there could be a sustained decline in oil prices. That hardly seems to be the case.

The recent talk about the future of mortgage lending giants, Freddie Mac and Fannie Mae, has revived concerns about the acuteness of the American financial crisis. The analyst community seems convinced that a slew of write-downs and capital losses by banks and financial institutions are due soon.

Alternatively, if oil's role as a dollar hedge diminishes and markets focus instead on fundamentals in valuing oil, the price of oil could drop. Last week's sell-off in oil suggests that some of this is happening. However, it is premature to think that this will continue. A couple of negative headlines about a threat to oil supply and more write-downs by US banks could push oil prices back over $140 in no time.

• Inflation, the silent killer

It pays to be prudent in these volatile times. Traders, investors, and policymakers cannot afford to get distracted by a couple of weeks' inflation releases. Only when a sudden turn shows enough stability to become a sustained trend can they afford to let their guard down.

That perhaps means more hikes in the RBI's repo rate and cash reserve ratio are coming our way in the monetary policy due at the end of the month.

The author is chief economist, HDFC Bank [Get Quote]. The views here are personal