Illusion and reality

Illusion and reality

The headline inflation number continues to look benign. The latest data released on Friday shows that inflation slowed down to 3.01% in the week ended 24 November. Does this mean that RBI should start preparing for a cut in interest rates?

No. These numbers are misleading—for several reasons. One, they are for wholesale prices rather than for what consumers pay. Consumer price inflation is at least twice as high.

Two, even the drop in wholesale price inflation is largely due to the sharp 9.6% drop in the prices of vegetables from their levels last year.

Three, the government’s refusal to hike domestic oil prices continues to artificially suppress inflation.

The inflation numbers on their own are no justification for lower interest rates right now. Even the drop in vegetable prices is not in sync with anecdotal evidence from the bazaars. The price numbers need to be taken with a pinch of salt.