Deflation is statistical,nothing to worry

This is the first time in more than 30 years that inflation has fallen to negative levels.

After three months of playing hide-and-seek with sub-zero levels,the wholesale price index-based inflation finally slipped into the negative territory with the annual rate of inflation falling to minus 1.61 per cent in the week ending June 6. It stood at 0.13 per cent the previous week.

This is the first time in more than 30 years that inflation has fallen to negative levels. The last time was in 1978-79 when food prices had suddenly plummeted because of a good harvest. The statistical deflation,however,is not a cause of concern as it is in some economies that have gone into a deflationary spiral,where people postpone purchases of goods and services and companies cut back on production.

In fact,this week corresponds with the week last year when the government raised prices of petrol and diesel by Rs 5 a litre and Rs 3 a litre,respectively,pushing inflation up to 11.66 per cent. The wholesale price index WPI that has been rising at much more moderate levels this year stands at 232.7 now as against 236.5 a year ago after the fuel price hike.

Though WPI-based inflation has turned negative,consumer price inflation remains rather high at over 8 per cent due to steadily rising food prices. The WPI largely comprises intermediate goods while the consumer price index CPI has food prices as a large chunk of it,which is why it is still so high, chief statistician of India Pronab Sen told The Indian Express.

According to the finance ministry,inflation in combined food index went up to 9.4 per cent from 9.2 per cent in the previous week. It said wholesale prices were expected to start rising by 2009-end and on average show an increase for the current financial year through March.

Experts believe this particular phase of inflation is likely to last for about two months since WPI climbed rather steadily last year after the fuel price hike because of its second-round effects. So,depending on how fast WPI can catch up with its year-ago levels,well see negative inflation till at least mid-end July, Sen said.

This deflation is also not of any serious concern to the economy since month-on-month inflation is still positive,which means that prices are still rising. A steady rise in commodity prices and improvement in the global economy could actually fuel inflationary pressures by the year-end and prompt the RBI to raise rates.

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Negative inflation,however,need not necessarily translate to easing of interest rates as the industry has been expecting for some time. Sen feels there is a need to wait for investment demand to pick up at the current interest rates before going in for another cut.

Some economists believe this phase of deflation is actually good for the economy as it means that the prices of inputs and intermediate goods are falling more rapidly than those of finished goods,which will only help the manufacturing sector cope with falling output seen over the past few months.