Inflation, deflation

Weakening wholesale inflation isn’t unique to India. China’s producer prices have come down as well, resulting in large deflationary shock affecting rest of the world

Indian wholesale prices have fallen for 17 months in a row. Much ink had been spilled last year about the wide gap between the two main measures of inflation—one based on consumer prices, the other on wholesale prices. The latest data suggests that this gap has narrowed. The Reserve Bank of India was right to base its interest rate policy on consumer price inflation rather than wholesale price inflation, despite pressure from the finance ministry for premature monetary easing.

The Asian Development Bank showed in a report released in March that most countries in the region, except Indonesia, have seen wholesale prices falling in 2015. This means that India is not an exception. The most important example is China. Its producer prices have come down for 48 months in a row thanks to massive overcapacity. This has amounted to a large deflationary shock emanating from it to the rest of the world. India just could not have been immune to this shock.