WPI turns negative | But This Is No Deflation

WPI turns negative But This Is No Deflation
The Economic Times, June 19, 2009, Page 10

FINALLY, we have a negative inflation number. The wholesale price index for the week ended June 6, 2009 fell by 1.61% from a year ago, provisionally. This is the first fall since December 1978, and is largely due to the high base effect caused by the sudden jump in prices last year. Inflation was rising at an accelerated pace early June last year, driven by the sharp rise in prices of fuel and power as well as manufactured goods. The WPI had reported a 11.7% rise for the week ended June 7, 2008. The situation has dramatically changed since then. Growth collapsed globally with many countries slipping into a recession. And this cooled commodity prices, including that of petroleum products. Earlier this year when the rise in inflation began to ease, some feared that India could slip into deflation. Indeed, that was an exaggerated fear, although the pace of growth slowed. Even the latest set of inflation numbers should not fuel any such concerns. Anecdotal evidence suggests that demand is reviving, much of it due to the three fiscal stimulus packages and cheaper cost of borrowing. Indeed, many economists have dismissed the negative number as a statistical phenomenon. The declining inflation may persist for a few weeks due to the high base last year.

At the same time, it should be noted that general price level continues to rise, albeit at a slower pace compared to the same period of the last year. Since the beginning of this fiscal, the index for all commodities have risen 1.8%, for primary articles by 3.5%, for fuel group by 1.6% and for manufactured products by 1.4%. It must be noted prices of manufactured products — constituting about 64% of the index — continue to rise on a week-on-week basis. Prices of primary food articles such as fruits and vegetables slipped compared to last week. However, prices of these products are unlikely to stay depressed for long. With monsoon expected to be somewhat weak, prices of farm produce are bound to rise. Also, the declining inflation has not meant that cost of living is falling. The consumer price index (CPI) for industrial workers rose a faster 8.7% in April 2009 compared to 8.03% in March. CPI for rural and agricultural labourers also continued to rule above 8.5% in April 2009.