Inflation or deflation? A quick guide on how consumer prices are behaving in Indiahttps://indianexpress.com/article/explained/inflation-or-deflation-a-quick-guide-on-how-consumer-prices-are-behaving-in-india/

Inflation or deflation? A quick guide on how consumer prices are behaving in India

Prices of goods in the wholesale market including those imported from abroad principally crude, were also rising in goose step.

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Historically prices in each decade have not only risen since Independence but has often risen so fast as to often eject the governments of the day. (Reuters)

Just how prices are behaving in India? Till December 2013, the answer was a simple and bitter one. The prices of goods and services that matter for consumers like you and me rose at 12 per cent in that quarter. Prices of goods in the wholesale market including those imported from abroad principally crude, were also rising in goose step.

The picture has got a tad complicated since. In just one year or four quarters since then the pace of rise in consumer prices have come down to 4 per cent. It has barely accelerated since then, which means prices are still rising but a lot slower than we could have expected. It is a rapid cooling off.

Some of the reason for the cooling off lay abroad. The prices of goods India imports crashed in the same period.

Prices of oil, gold and copper and other internationally traded commodities fell as demand began to fall off thanks to turbulence in Greece and then China. These are the wholesale prices whose index has now slipped into negative territory.

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So here is the riddle. Are prices still rising, which means there is inflation or are prices falling which would mean it is deflation time?

Chief economic advisor, Arvind Subramanian said this week the Indian economy may be entering deflation territory. In other words the spectre of falling prices may be more real now than that of a price rise.

It gets complicated however when one looks at what makes up the consumer price basket. In July 2015 while the all India consumer price index (combined) was 3.78 per cent that for health care was 5.59, for education at 6.59 and for pulses at 22.8. These are products whose supply cannot be raised fast yet for the lower income groups those prices are very important. Obviously this is the reason why the RBI survey of inflationary expectations shows housewives believe prices would rise. People will believe what they see.

For manufacturers the picture is the reverse. They are sure prices would mostly remain flat for what they produce. Prices of manufactured goods are not rising in markets abroad or even within India. It is a deflationary environment for them.

This is a new terrain for the Indian economy. Historically prices in each decade have not only risen since  Independence but has often risen so fast as to often eject the governments of the day. The RBI would like to wait a
bit more to be satisfied that price rise even for pulses and education are on a downward trend too. Industries are sure that if the central bank waits that much more, the rapid cool off in the economy will force many of them to close shop.