I am dead sure, you will be saying who dare say that prices are coming down
This is the same question, I am going to ask to those who belive & make us belive that Inflation is long gone; Deflation is about to set in.
Will somebody tell me, how this is possible that economy is growing @ 6.5% & demand is at near-zero level. How is it possible that there is deflation in economy & yet interest rates are still in double digit figures?
Someone out there is causing rumors of deflation, because even government is finding it hard to believe, but before starting an argument lets understand what is Deflation?
Deflation is exact opposite of inflation.
In inflation, prices increase, i.e. supply is less and demand is more, on the other hand in Deflation, growth rate in prices goes down and becomes negative, because of lesser demand and more supply in market.
On the basis of this definition a complex and confusing picture emerges, but alas (pun intended) these statistics cannot make ground realties change.
Now lets us look at that figure which caused all this hoopla. Whole Sale Price Index Base Inflation Rate, recently went down to 0.44% (latest figure being 0.26%) which is lowest in last 14 years. On this basis, technically Deflation is about to set in, but as I said earlier, ground relaties are different and this would not happen.
Tere are so many good reasons behind this. Infact indexed deflation and economic deflation are two separate concepts. WPI based inflation rate last year was around 8%( remember when was hovering around 100 $ per barrel mark), thus making this fall in inflation rate normal. Ground realties tell us a different story altogether, which is that economy is not in deflation mode at all.
Very first point could be that deflation is not based upon few weeks or months rate fall. Ideally, to measure deflation, one year time period is desirable.
Second point is real deflation comes in that condition in which growth rate of economy becomes negative, all manufacturing activities comes to a halt, markets are without any supply of money and demand for goods is zero. One interesting fact is that 60% of Indian GDP is based on domestic demand. Economy is growing @ 6% rate. Deflation terrified people, breath easy, because you are using an index which has no relation with reality
Latest figure revelas that consumer market price index based inflation rate is still hovering around 8% mark and trhis in turn is the reason for banks not aceepting deflation scenario, otherwise all banks would have lowered interest rates. Market and economy do not accept deflation at least at this point of time.
Prime lending rate of banks is still at around 10-12%, deposit rates are also on a higher side. If real prices go down, credit becomes cheaper and aggregate demand should increase. To increase demand, it is more important to reduce prices than increasing supply of money. So it might be a blessing in disguise, that prices are heading southward, even if it is in form of so called deflation, because only fall in real prices alone will bring an increase in aggregate demand, nothing else will do.
