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Inflation at 0.44% but don't celebrate

Inflation fell to an all-time low of 0.44 per cent with analysts expecting it to turn negative in the next couple of weeks. But this does not mean that prices of goods have begun to fall sharply. Listen to podcastaudio | Life after inflation

business Updated: Mar 20, 2009 02:16 IST
Gaurav Choudhury

Inflation fell to an all-time low of 0.44 per cent with analysts expecting it to turn negative in the next couple of weeks. But this does not mean that prices of goods have begun to fall sharply.

Official data showed inflation measured by wholesale prices fell sharply for the week ended March 7 to 0.44 per cent from the previous week’s 2.43 per cent. The previous low of 1.13 per cent was recorded on February 2, 2002.

Prices, however, continue to remain high, based on the consumer price index data that is released monthly. CPI inflation remains firm at 10.4 per cent in January.

Prices of food products continued to remain high, although there has been a slight moderation. ‘Food articles’ inflation ruled at 7.4 per cent, down from the previous week’s 8.3 per cent.

The fall in inflation has been largely due to sharp drop in the index of ‘fuel and power’ that has contracted by 6 per cent compared with a contraction of 5.1 per cent in the previous week.

If at all, the low inflation will give more elbow room to the Reserve Bank of India (RBI) to cut interest rates.

“It is a good development,” Planning Commission deputy chairperson Montek Singh Ahluwalia said. “It gives us reassurance that we can take measures to stimulate the economy.”

The government said India was not headed for a deflationary situation where falling income lowers demand and prices of goods.

“It (low inflation) is more indicative of a base effect rather than any price effect,” cabinet secretary K.M. Chandrasekhar said, adding there were no signs of deflation.

Economists expect inflation to remain in the negative zone for the next few months.

“We expect negative readings to start in late March or early April, lasting for around two quarters (six months),” said Sonal Varma of Nomura Financial.

Analysts expected a further cut in interest rates.

“This has provided more headroom to the RBI for further strong monetary measure to revive demand and support the economy,” said Yashika Singh, economic analysis head, Dun & Bradstreet India.

The RBI has cut its key lending rate repo rate by 4 percentage points to 5 per cent since October, the last one early this month to boost growth amid an unprecedented world economic slowdown.

gaurav.choudhury@hindustantimes.com

What is what

Inflation: It measures the rate at which prices are rising. A low rate of inflation does not mean prices are falling. It means prices are rising at a slower pace

Deflation: Negative inflation, resulting from a sustained reduction in prices. It occurs during a recession or a severe economic slowdown

Dis-inflation: Negative inflation but not necessarily because of a fall in prices of goods. It happens due to a statistical inevitability called a “base effect”

Stagflation: A period of slow economic growth, high unemployment (stagnation) while prices rise (inflation)