India is very likely to have a short spell of disinflation sometime during this year. Inflation in India has already more than halved in the last 6 months from a high of 12.91% to just 5.24% according to the latest figures. During June – August 2008, price levels and inflation were very high. This means that during the same time this year, inflation is likely to be very low or even negative.
The good news is that disinflation is not likely to last long. Inflation is computed as change in the Wholesale Price Index (WPI) between one week and the same week the previous year. High price levels in June-August 2008 mean that inflation will be low during June-August 2009, a phenomenon known as the base effect.
A prolonged period of disinflation, or deflation, is harmful to the economy. At first glance, this might appear to be counter-intuitive since people can buy more with the money they already have (real balance effect). Deflation means that companies have to sell goods for less. Production will have to come down meaning that workers will have to be laid off or paid lower wages. This, in turn means that people have lesser money to repay their debts (debt deflation). With some luck, India will not enter the long and treacherous disinflationary territory.
Coming to India this summer – Disinflation
India is very likely to have a short spell of disinflation sometime during this year. Inflation in India has already more than halved in the last 6 months from a high of 12.91% to just 5.24% according to the latest figures. During June – August 2008, price levels and inflation were very high. This means that during the same time this year, inflation is likely to be very low or even negative.
The good news is that disinflation is not likely to last long. Inflation is computed as change in the Wholesale Price Index (WPI) between one week and the same week the previous year. High price levels in June-August 2008 mean that inflation will be low during June-August 2009, a phenomenon known as the base effect.
A prolonged period of disinflation, or deflation, is harmful to the economy. At first glance, this might appear to be counter-intuitive since people can buy more with the money they already have (real balance effect). Deflation means that companies have to sell goods for less. Production will have to come down meaning that workers will have to be laid off or paid lower wages. This, in turn means that people have lesser money to repay their debts (debt deflation). With some luck, India will not enter the long and treacherous disinflationary territory.