Deflation or just a statistical muddle?

Saturday, June 20, 2009 , Posted by Sarvesh at Saturday, June 20, 2009

The inflation for the week ended June 06, 2009 stood negative by falling sharply to –1.61% from the previous week’s level of 0.13%. However, the negative run of the inflation has raised concerns of the analysts of its co-relation with the actual price scenario in the economy.

The decline in the inflation rate was mainly attributed to the high base effect of the previous year created by a steep 1.8% week-over-week (WoW) increase during the corresponding period of the last year.

The wholesale price index (WPI) stood at 232.7 marginally up by 0.04% on a WoW basis. The WPI has, continued its increasing trend on a sequential basis for the past seven weeks, despite the headline inflation rate remained below 1% for past three months.

The rise in the inflation rate was mainly on the back of a 0.68% WoW rise in the fuel, power & light category. The inflation rate in the primary articles category declined by 0.66% WoW as the inflation rate in the nonfood articles remained negative at –0.92% for the week.

However, the inflation rate in the food articles segment remained high and inched up to 8.71% from 8.6% in the previous week, which is worrisome.

The deflationary trend in the fuel, power & light category has now continued for over six months with the inflation rate for the segment reaching –12.83% for the week.

Interestingly, the inflation rate measured in terms of the Consumer Price Index (CPI) remains high despite the WPI inflation falling to sub-zero levels. The inflation rate in terms of the CPI (for industrial workers) has softened from its peak of 10.5% in January 2009 but still remains high at 8.7% as in April 2009.

The inflation measured in terms of WPI has fallen significantly from its peak of 12.91 in August 2008 and is now in the negative zone.

However, according to experts, the negative inflation rate is more statistical in nature and not a result of any significant fall in the consumption demand. The actual price scenario is much different from, which could be understood from the negative WPI inflation. The fact is that the inflation measured in terms of the CPI is still hovering at higher levels.

Considering the sharp fall in WPI inflation, central bank would require a strong monetary easing policy. However, experts opined that any such move is unlikely as there is ample liquidity in the system and further stimulus may cause the fears of higher consumption led inflation on account of expectations of economic recovery.

Source: Commodity Online

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