India's inflation rate slipped into negative terrain for the first time in last 35 years. Annual inflation rate declined to -1.6% for the week ended June 6, 2009 as compared to 11.7% during the corresponding week last year.
Now, what does this mean? Should we call it deflation or disinflation or something else? To my mind these numbers have only statistical significance. I don’t think India is facing deflationary pressure at all. In fact, prices for certain commodities have gone up very sharply off late. Mainly, it’s the high base effect which has forced inflation into the negative zone.
Another important thing to notice is that Inflation in India is based on wholesale price index (WPI) unlike most countries which follow consumer price index based inflation. The wholesale price index (WPI) takes into account the wholesale prices of commodities whereas the consumer price index (CPI) considers prices of goods and servicesat the retail level.
So if we go by CPI-based inflation rate like most other countries do, inflation in India is still ruling firm at near double-digits in light of high food prices. Annual inflation measured in terms of consumer price index (CPI) stood at 8.7% in April’09.
Secondly, if we calculate WBI-based inflation on a monthly basis, it becomes crystal clear that inflation has been picking up for last three months. Going forward, I expect inflation to pick up sharply around Sep-Oct’09 once the base effect dies its own death.
I don’t think RBI need to cut its key interest rate going forward as it has already brought it down by 425 basis points since October’08. Let me know whether you agree with me or not and if not why so?
I have been following your blog for quite some time now,the content is really good in all your articles,On Deflation,I would agree with you that India is not facing deflationary pressure at all.It is other way around.
anyways....Keep writing good articles like this and previous ones.
hi... m sonali lohia... second yr. student... mount carmel college banglr. i liked yur blog... and m very much impresed... so i want to use it for the lecture series organised in my college,,, for that i need clarifications on the following.. 1.. defn, of base effect. 2.difference b/w wpi n cpi... if possible mail me at kaedoo@gmail.com......... tankz...
Week 30 2007 - index was at 100 (100 is just an example). Week 31 2007 - index was at 98.
Week 30 2008 - index is at 112.
Thus, inflation is 12% (12% increase in prices).
Week 31 2008 - index is at 112.
Thus, inflation will be at 14.29%.
The index didn't move up, but the inflation went up as corresponding base was lower.
This is the base-effect for inflation.
I hope this will help you understand the concept of base effect.
2) The wholesale price index (WPI) takes into account the wholesale prices of commodities whereas the consumer price index (CPI) considers prices of goods and services at the retail level.
Let me know if you need further clarification on the same. Wish you luck for you series.
Posts
Hi Gautam,
ReplyDeleteI have been following your blog for quite some time now,the content is really good in all your articles,On Deflation,I would agree with you that India is not facing deflationary pressure at all.It is other way around.
anyways....Keep writing good articles like this and previous ones.
All d Best & Take care.
Regards,
Janamjai
Thanks Janam. I appreciate that you find my blog useful. I simply glad to see your comments. Thank you once again.
ReplyDeleteHey Gautam,
ReplyDeleteNice to see another informative post on our economy. Your posts are well researched and backed with facts.
You make my task of keeping myself updated with the latest happenings a matter of two mins... thanks.
Warm Regards,
Charu
Charu: I enjoy your comments...they motivate me..thanks a lot.
ReplyDeletehi... m sonali lohia... second yr. student... mount carmel college banglr. i liked yur blog... and m very much impresed... so i want to use it for the lecture series organised in my college,,, for that i need clarifications on the following.. 1.. defn, of base effect.
ReplyDelete2.difference b/w wpi n cpi... if possible mail me at kaedoo@gmail.com......... tankz...
Hi KSR:
ReplyDeleteHere is one example to explain base-effect:
Week 30 2007 - index was at 100 (100 is just an example).
Week 31 2007 - index was at 98.
Week 30 2008 - index is at 112.
Thus, inflation is 12% (12% increase in prices).
Week 31 2008 - index is at 112.
Thus, inflation will be at 14.29%.
The index didn't move up, but the inflation went up as corresponding base was lower.
This is the base-effect for inflation.
I hope this will help you understand the concept of base effect.
2) The wholesale price index (WPI) takes into account the wholesale prices of commodities whereas the consumer price index (CPI) considers prices of goods and services at the retail level.
Let me know if you need further clarification on the same. Wish you luck for you series.