Thursday’s news that inflation has fallen to an 11-month low is a temporary plus for consumers all over India. But like most recent economic data, this portends more harm than good.
The annualized Wholesale Price Index for the week ended 3 January stood at 5.24%, lower than the 5.91% the previous week. The index has been falling in recent months from its August high of 13%, and the government expects the fall to continue. The bond market, among others, is rejoicing, with lower yields on 10-year notes.
Low inflation amid a global economic slowdown isn’t a surprise. GDP growth is expected to fall to 7% for 2008-09 and, according to a Citigroup report this week, to 5.5% for the next fiscal year. In this light, disinflation shows an ailing economy.
Going forward, a monetary expansion could inflate price levels. Or worse, as the same Citi report notes, India could go the other way, witnessing deflation in the middle of 2009. If this is the case, the resulting debt-deflation spiral opens a dangerous new front for the economy.