Inflation in Negative!

Finally as everybody expected, Indian Headline Inflation measured by WPI method is in negative. For the week ended June 6th Inflation came as -1.6% as compared to 0.13% of week ended for May 30th.

Guys you might observe that in my heading I havent mentioned it as Deflation! Even though inflation is in negative region, its not because of economical conditions like less demand or too much contraction in the money supply, but it is due to HIGH BASE EFFECT. About which I have mentioned times in my previous postings.

India is facing this negative number in Inflation after a gap 3 decades, that is from 1975-76. At that time the lowest Inflation India faced is -11.3%. For this there were reasons...

1. High base effect due to triple or quadrupling of oil prices from sub levels of $ 20 to $ 60 within a very short time. And again sudden fall of 60% from its top levels of $ 100 per barrel.
2. Political drama of emergency during that period

Now also inflation is in negative because of higher oil prices in last year. Many time I have written how we are failing to measure future values of Inflation or its impact or containing it due to WEEKLY MEASUREMENT OF WPI. And once I have written uses of measuring the inflation month wise. In similar manner, my favorite blogger, Mr. Ajay Shah is of the opinion....

"Indian economy had been in a deflationary environment for the last eight months and that inflation needed to be calculated on a month-on-month basis and not on the yearly average, as is the practice.

It (calculating inflation on a month-on-month basis) gives you a picture of what’s going on in the economy. When you do that, all the way from August 2008 onwards, the WPI inflation has been in negative territory month after month,

RBI needed to stop using the year-on-year benchmark to calculate WPI in order to arrive at a better understanding of inflation, which would help it take better decision as regards to monetary policy. What is going wrong with monetary policy in India is: when times are good, we end up having low rates because policy is focused on preventing rupee appreciation and flooding the market with liquidity. When times are bad, we don’t cut rates adequately to reflect the change in conditions, so I do think that we need to go towards lower rates."