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Record Low Inflation-Issues and Causes
Jul 20, 2017

According to the latest government data, the Wholesale Price Index (WPI)-based inflation (Base Year 2011-12) has dipped to an 11-month low of about 0.9% in June 2017. 

  • The dip in WPI inflation is driven by fall in inflation in all three major sub-groups - primary articles (includes food and non-food articles), fuel and manufactured products. 
  • Similarly, the latest Consumer Price Index (CPI) data show that headline retail inflation has decelerated to a record low of 1.54% in June 2017.

Causes for Decline 

  • Food and beverages, which account for 45.86 per cent in the CPI have been a major factor of this decline. The food-and-beverages inflation has witnessed a sharp decline over the last one year. 
  • In India, there are other factors also that point to lower inflation such as fiscal deficit has come down, the rupee has strengthened, the rains have been good and the government has successfully managed food prices. 
  • A lower increase in minimum support prices (MSPs) has also kept inflation under check.
  • Core inflation too has come down in recent months. To be sure, there are countervailing arguments—lower inflation is due mainly to lower vegetable and pulses prices, a base effect and there are concerns over the fiscal impact of farm waivers and increased house rent allowances for government employees. 

Relation between economic growth and inflation

  • It cannot be denied that the decline in inflation has largely been on account of retail food prices falling 2.1%. But even “core” inflation (which measures price increase in goods other than volatile food and fuel components) is down to 3.9%. 
  • The overall retail inflation has consistently been below the Reserve Bank of India’s (RBI) medium-term target of 4 %  for the last 8 months. 
  • Also, there are noticeable price declines in many sectors like agriculture and real estate.
  • All this points to the growing disinflationary trends in the economy.

Should RBI declare rate cuts?

  • The RBI may have an inflation target of 4% but what it should be really worried about is the cost of achieving and maintaining a very low inflation rate. At times, even the absence of interest rate cuts hurts growth.

Global trend in Inflation

  • It’s not just in India that inflation is low. In the US, consumer price inflation for June fell to 1.6. In the eurozone, inflation has been declining. In China, CPI inflation for June was 1.5%, well below the government’s 3% target. And in Japan, where they celebrate rising inflation as a relief from the deflation that has plagued the economy, inflation for June came in at 0.4%, way below the target of 2%. 
  • Industrial automation and international competition in labour markets have led to an erosion of bargaining power for labour and are behind the declining share of labour in national income seen in many economies.
  • One of the main causes of inflation—wage pressure—has been kept under check in recent times, thanks to globalization and technology. 
  • Putting it another way, a part of inflation has been the end result of the ability of workers to force wage increases, but labour has become increasingly powerless in recent times and consequently one important reason for inflation is absent.

Way Forward

  • It must be considered that moderate inflation level is needed to drive consumption, increase production and enable debtors to repay loans easily, thus encouraging borrowing and lending. 
  • The short-term outlook for the economy shouldn’t take away from the many positives that should yield results a few quarters from now. 
  • The GST will result in a sizeable lowering of transaction and logistics costs, and will begin to feed into prices only over the coming months. 
  • The implementation of the newly enacted insolvency and bankruptcy law will have a similar impact, in terms of improving the overall ease of doing business in India.
  • Ultimately, the RBI will have to weigh whether the current trends in inflation are likely to remain resilient enough for it to make a move that doesn’t end up proving to be a costly error in the long run. 

PT Facts 

  • Headline inflation is the raw inflation figure as reported through the Consumer Price Index (CPI). The CPI calculates the cost to purchase a fixed basket of goods, as a way of determining how much inflation is occurring in the broad economy. 
  • Core inflation reflects the long-term trend in a particular price level. Core inflation is most often calculated using the consumer price index (CPI), which eliminates products — usually those in the energy and food sectors — that can have temporary price shocks because these shocks can diverge from the overall trend of inflation and give a false measure of inflation.
  • Producer Price Index (PPI) measures the average change in the selling prices of a basket of representative goods and services sold by manufacturers and producers. It measures price change from the perspective of the seller. 

 

Comparison between CPI and WPI

Consumer Price Index Wholesale Price Index 
  • CPI for Industrial Workers (IW) and CPI for Agricultural Labourers (AL) / Rural Labourers (RL) are compiled and released by the Labour Bureau in the Ministry of Labour and Employment,
  • CPI (Rural/Urban/Combined is compiled by the Central Statistics Office (CSO) in the Ministry of Statistics and Programme Implementation.
    Base Yea
    r: 2012
  • Computed by the Office of the Economic Adviser in Ministry of Commerce & Industry.
    Base Year: 2011-2012
  • It is based on the retail prices of products and measures inflation from the consumer side. RBI uses CPI (combined) to monitor inflation. 
  • It is based on wholesale prices of articles and measures inflation for the economy as a whole.
  • It covers only the consumer goods and consumer services. 
  • WPI, on the other hand covers all goods including the intermediate goods.

 


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