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A temporary problem

A temporary problem
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First Published: Thu, Mar 19 2009. 11 40 PM IST
Updated: Thu, Mar 19 2009. 11 40 PM IST
India is now just a whisker away from deflation. Should we worry?
The government said on Thursday that inflation for the week ended 7 March, measured by the Wholesale Price Index, was a mere 0.44%, a 30-year low.
Deflation is a serious threat to any economy—perhaps even more than inflation is. There are two main reasons for this. One, a negative rate of inflation ensures that real interest rates continue to be at elevated levels despite the need to bring them down. Two, consumers get used to falling prices and, hence, have an incentive to postpone buying decisions in the hope that they can get the same item cheaper a few months down the line. That can lead to a demand collapse and a downward spiral of further deflation and falling growth.
Large parts of the world are currently close to such persistent deflation—but not India. The drop in inflation to almost zero is because of the high base at the same time last year. And consumers continue to face high inflation—almost in double digits for some classes.
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First Published: Thu, Mar 19 2009. 11 40 PM IST