Deflation or Disinflation?
Now that high inflation seems to be a thing of the past—at least for the time being—a new confusion over the rate of price rise is dominating the public debate.
Are we slipping into a deflation? Or is it disinflation?
An economy enters deflation only if contracting demand drives prices down. Typically, consumers delay spending, seeing prices fall, which contracts demand further. What India is seeing is the more benign disinflation, which is a statistical fall in prices.
But are worries over inflation a thing of the past? Not really. Inflation as measured by the Wholesale Price Index (WPI), has dropped to near zero due to a high base. In mid-March, the annual inflation rate came down to 0.27 per cent, the lowest in the last 32 years. The inflation rate stood at 8 per cent during the same time last year. The RBI has, however, ruled out chances of deflation. “There is no fear of sustained deflation in India,” RBI Governor D. Subbarao said on March 26.
That does not, however, mean prices aren’t rising. The Consumer Price Index (CPI), which is a more apt measure for inflation, is still high at 10.4 per cent for January 2009 and rising. “WPI inflation has dropped to 0.22 per cent, but the CPI is still elevated,” warned Subbarao.
— Puja Mehra
An economy enters deflation only if contracting demand drives prices down. Typically, consumers delay spending, seeing prices fall, which contracts demand further. What India is seeing is the more benign disinflation, which is a statistical fall in prices.
That does not, however, mean prices aren’t rising. The Consumer Price Index (CPI), which is a more apt measure for inflation, is still high at 10.4 per cent for January 2009 and rising. “WPI inflation has dropped to 0.22 per cent, but the CPI is still elevated,” warned Subbarao.
— Puja Mehra
