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Negative inflation no cause for worry |
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Wholesale price inflation continued in the negative for a second straight week. The annual WPI-based inflation declined by 1.14 per cent during the week ended June 13, easing marginally from the minus 1.61 per cent recorded in the previous week. Year-on-year inflation was recorded at 11.80 per cent during the corresponding week of the previous year.
The Primary Articles group recorded a marginal decline in inflation during the latest reported week to 5.7 per cent from 5.8 per cent in the previous week. In food articles, inflation fell to 8.65 per cent from 8.71 per cent in the week ended June 6, 2009 due to fall in inflation in cereals.
In non-food articles, inflation deepened to (-) 1.3 per cent from (-) 0.9 per cent in the earlier week. In the ‘minerals’ subgroup, inflation remained unchanged at 4.2 per cent for the third consecutive week. In the fuel and power index, inflation eased fractionally from (-) 12.8 per cent in the week of June 6 to (-) 12.6 per cent in the current week.
In manufactured products, inflation during the week ended June 13 accelerated by almost 80 basis points to 0.8 per cent, from 0 per cent in the previous week.
The RBI Governor, Mr D. Subbarao said falling wholesale prices are only a statistical feature and do not mean India is suffering from deflation.
Analyses: There has been a negative trend on inflation for two weeks now. But for the food prices that have been rising persistently, the negative trend would have manifested much earlier. The main concern that has re-surfaced is the fear of deflation. The textbook version of a deflationary spiral is a process in which people decide to postpone spending because they expect prices to fall some more. This translates into a fall in output, lowering incomes and demand even further.
However, GDP growth has surprised everyone and the recent turnaround in industrial production, however modest, indicates that such a downward spiral is not at work. The inflation number is negative almost entirely because of the inordinately high base of last year. Since then, the prices of oil and virtually all other commodities have fallen sharply. This, then, is negative inflation arising from positive developments on the supply side and should not be any cause for concern. It does not carry specific policy implications, but it does strengthen the case for further rate cuts by the Reserve Bank of India in the next quarterly announcement at the end of July. Signs of stability and even modest revival suggest that the policy measures initiated over the past few months are working and the best bet for monetary policy is to remain neutral.
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