0.44% Inflation

 

 

Breaking News: Inflation is at a historic low! Head to the nearest vegetable vendor and you feel cheated by the news, and perhaps all the more by your very own interpretation of the statistic called inflation. True, the headline inflation numbers have come down ‘drastically’ but has it translated in some respite for the common consumers (aam aadmi – if you so please)? Do a reality check and you will get your answer – a big No! The inflation index – WPI (wholesale price index) – as displayed on your television screen is a flawed measure; it conceals more than what it reveals, like all good statistic. Whether in urban centres or in the rural heartland, at the retail level the current inflation is well over 10 per cent and not 0.44 per cent as the Breaking Newswallahs attempt to put it.

There are three kinds of falsehoods – lies, damn lies and statistics. Statistics on inflation are manufactured at the government factory (read Commerce Ministry), especially when the stakes are high. So, when the government pegs the current inflation as ‘a mere statistic’ at 0.44 per cent (statistically a historic low), one is left to wonder whether even today the Indian audiences are educated enough to see through this lie.

As the WPI touches that so called historic low, thanks to easing fuel prices, falling global commodity prices, policy measures such as a cut in duties and interest rates and most importantly, the high base effect, the disjunct between the two measures of inflation, viz. WPI and CPI (consumer price index) becomes all the more vivid. The low inflation rate, however, has not at all translated into low prices for items consumed by the common man. And here is the catch: declining headline inflation does not necessarily imply prices coming down. It only implies that the rate at which the prices of goods were rising has become slower. So when one hears that inflation is down to 0.44 per cent, what it really implies is that the prices today are higher by 0.44 per cent as compared to the prices on the same day a year ago. That’s a harsh reality many of us would not agree to accept. In fact, the prices will come down only when the inflation numbers turn negative (economists prefer calling it deflation).

According to Harsh Pati Singhania, President, FICCI: “Inflation rate has been coming down over time and these latest numbers are not entirely unexpected. However, the fact that WPI has come down to 0.44 per cent on a year-on-year basis, despite prices of food articles going up by 7.3 per cent on a yoy basis shows that inflation in case of other products has declined significantly. The high base effect also has a role to play in this case, as inflation stood at 7.78 per cent during the corresponding week of the previous year.” A quick reality check reveals that the consumer prices are consistently moving northwards while the headline inflation moves southwards. Picture this – inflation rate (as on March 7, 2009) for sugar, salt, pulses, cereals, milk and spices are respectively pegged at 22.37 per cent, 11.07 per cent, 10.97 per cent, 10.16 per cent, 7.1 per cent and 6.23 per cent – now that’s the bitter reality. The miniscule weightage attached to this key category and the high price that these food items command is subtly dwarfed by the inclusion of numerous other commodities, which, strictly speaking, do not qualify within the ambit of essential goods.

The current basket of WPI does not include power bills, medicines, education, transport et al (which, in the real sense, involve a heavy outgo), but is tilted more towards manufacturers, so that the behaviour of the index for this group largely determines the movement of the overall index. Now that’s the manipulation that the government has been resorting to; had it not been so, the headline inflationary picture could well have been altogether different. As a matter of fact, the retail-based inflation continues to be in double digits; consumer price indices for agricultural labourers (CPI- AL) and for rural labourers (CPI- RL) are both pegged at 10.79 per cent.

Actually, the real difference is in the constituents of the index, for the government plays around with WPI data, while what really matters to the aam aadmi is CPI. Consider this: food prices have about 60 per cent weightage in CPI (AL and RL), while its weightage in WPI is around 15 per cent, thereby overshadowing the importance of consumption basket of the masses.

Though deflation fears exist, at the retail level it is a distant dream. Nevertheless, the government has been quick to rule out any such possibility. Says KM Chandrasekhar, Cabinet Secretary: “I do not see any signs of deflation, as demand for certain sectors like steel, cement and automobiles is picking as also is rural demand. The inflation trend clearly shows that the stimulus packages rolled out by the government are starting to show results.”

According to Tushar Poddar, economist with Goldman Sachs Inc, (remember the BRIC report!) inflation will turn negative in April and will remain so until the end of 2009. What does the declining streak of inflation have in store for banks? Singhania expresses his fears as he says, “Alarmingly, given the present inflation rate and the interest rates being charged by banks, the real rate of interest in the economy is at double digit levels. Banks must lower lending rates to single digit levels if economic activity is to be stimulated.” More than that, consumers should in fact be now demanding for a real basket of WPI, which reflects the price volatility in actual terms and not in tandem with the manipulations of the government.