Inflation nears zero: WPI at 0.18%

In recent months, industrial output and inflation have both falling. That has led to fears of deflationary conditions prevailing in the economy, an undesirable phenomenon. Some expect the RBI to lower interest rates again to revive demand. But the RBI itself wants the impact of the measures it has taken to percolate fully, before it takes more measures.


Inflation in the week ended April 4, 2009 declined to 0.18%, chiefly due to a 5.9% drop in fuel and power prices and a 0.8% fall in the price of manufactured products. Energy prices have been declining on the back of the slump in crude prices. The decline in manufactured product prices is largely visible in basic products like steel and non-ferrous metals, as global prices have fallen sharply.


Products sold to consumers have not really become cheaper. In fact, the consumer price index, a benchmark of consumer inflation, has actually been much higher than the WPI. For example, consumer price index for industrial workers was up 9.6%, significantly higher than WPI during the month. The latest available inflation figure for urban areas is for January 2009; the CPI is estimated to be up by 10.4%.


Falling inflation means that interest rates will remain at the same levels, or even trend lower. That makes the business environment conducive for both companies and consumers, as borrowing costs go down. Equity markets too in general do well in low interest rate environments, as the risk-return ratio gets skewed in favour of equities.

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