Inflation Drops Below 11%

The only piece of good news that has been coming in amongst the financial chaos in India and the world for the past few weeks has been the decline of inflation and today continued that sentiment to some extent. Inflation has now fallen below 11% and the figures released today indicate the present number at 10.68%.The figure itself is not something to cheer about. A 10% inflation is still high but the declining rate of inflation from a high this year of Thirteen Percent  to what could in a month’s time be a single digit number has been encouraging.

Much of the drop in inflation has resulted from the fall in wholesale, commodity and oil prices. Oil which was priced in the $140-$150 a barrel range a few months ago coincided with a high inflation rate of twelve to thirteen percent in the Indian economy as well. Since the crackdown on rising oil prices began, a steady decline in inflation has also been observed which has declined with the drop in oil prices, though not correspondingly.

The Ministry Of Finance has dealt with this problem of inflation by increasing interest rates in an effort to restrict the amount of money released into the economy but the past weeks have seen the same ministry repeatedly cut interest rates via CRR and Repo rate cuts in an effort to increase liquidity within the economy. The government has the difficult task of balancing liquidity needs with inflationary pressures.

The method adopted so far has been to regulate strictly the amount of money being released into the system. Interest rate cuts in the past few weeks have been designed to help corporations and increase their chances of gaining credit while making sure that the same rate cuts do not overflow into the economy.

The real effect of the drop in inflation has however not been felt and that’s the most important aspect to be considered. The average consumer continues to pay more for household goods. Food and vegetable prices have dropped marginally because these are tied to the wholesale markets which benefit or suffer from the drop or rise in inflation.

Retail-wise packaged goods and FMCG’s continue to command the same high prices as before. Companies are building up margins for lower sales figures this quarter which have been forecasted because average consumers have increased their rate of saving and have stopped spending. Layoffs across companies have begun which will undeniably influence the rate of saving even more since those laid off will spend less and therefore buy less.

The effects of falling inflation have yet to be passed on to the petrol sector. Fuel prices despite having fallen sharply continue to lead the government to charge the same amount as before for a litre of petrol or diesel. There have been indications that the government might cut petrol prices soon but until it happens, consumers will not be satisfied because unless falling inflation impacts them by a corresponding fall in fuel,food and retail goods, it is just another number.