Inflation plummets to record low; skids under 1%

Inflation, as measured by the wholesale price index (WPI), tumbled to an all-time low in the first week of March due largely to a high base effect and partly due to the economic slowdown, data released by the Government showed. The annual, point-to-point inflation rate slid further to 0.44% in week ended March 7 as against 2.43% in the previous week, the Commerce & Industry Ministry. Expectations was for a reading of 0.8-0.9%. Inflation was at 7.78% during the corresponding week (March 8, 2008) of the previous year. The drop of 199 basis points in inflation is the steepest since the week ended November 1, 2008. In the last 30 years, there is no record of inflation falling this low since 1977-78, the Finance Ministry said in a statement.

Meanwhile, the Centre revised the inflation for the week ended January 10 to 5.46% from a provisional estimate of 5.6% announced earlier while the final WPI for the same period stood at 229.7 as compared to 230.0 projected earlier. Inflation for "Primary Articles" group was at 4.38% versus 5.84% in the week ended Feb. 28. Within this group, the inflation for "Food Articles" is at 7.35% as against 8.29% in the previous week. Inflation for "Non-Food Articles" group is (-)1.72% compared to 1.29% in the week before.

Inflation for "Fuel & Power" group stood at (-)5.95% versus (-)5.13% in the preceding week. Within this group, inflation for "Mineral Oils" is at (-)8.5% as against (-)8.58% in the week ended Feb. 28. while that for "Electricity" is -2.64% compared to 0.00%. Inflation for "Manufactured Products" group was at 1.32% for the week through March 7 versus 3.97% in the previous week. While inflation for "Basic Metals & Alloys" was (-)10.75%, that for "Food Products" stood at 6.03%. Inflation for "Beverages & Tobacco", "Textiles" and "Woods" stood at 8.96%, 8.41% and 10.05%, respectively. Inflation in the food index for the week ended March 7 declined to 6% compared to 7.5% last week. The contribution of various commodity groups to the year-on-year headline inflation for the week ended March 7 compared to the previous week is given as below:

Primary Articles contributed 227% to inflation, a quadrupling from its share of 56% in the previous week. Fuel & Power depicted negative contribution at (-) 289% relative to (-) 46% in the earlier week, registering a six-fold drop. Manufactured Products' contribution to inflation was 166% from 90% in the previous week.

That the headline WPI inflation will soon fall into the negative territory is a given. But, the truth is this is just a statistical illusion. Most of the current fall in inflation is due to a higher base of last year and partly due to the economic slowdown. At the retail level though prices remain high. Inflation based on various consumer price indices (CPI) has actually gone up since September. The year-on-year increases in WPI are still ruling high at 10.16% for cereals, 10.97% for pulses, 22.37% for sugar and 7.1% for milk, translating into a double-digit CPI inflation.

But, notwithstanding the high CPI inflation, there is a good chance of another round of monetary easing. Goldman Sachs expects a 150 basis point (bps) cut by June in the cash reserve ratio (CRR). "The higher base effect along with low demand in the economy is expected to keep inflation in negative territory for 5-6 months. Inflation will turn negative starting from April and will remain so until the end of 2009. We expect the RBI to ease liquidity to support growth," said Tushar Poddar, economist at Goldman Sachs.