Plus&Minus

"A weekly column: Plus&Minus will be published in Hindustan Times, Jaipur Live. This will speak to the ordinary reader on contemporary economic issues in a simple format".

Inflation Declines, but Food Prices Rise
Hindustan Times, Jaipur Live, June 29, 2009                                      <<Archive>>

By Pradeep S Mehta

In the last few days, the expected failure of monsoons has triggered a rise in fruit, vegetable and other food prices. The government is neither admitting to the possibility of a drought nor of food scarcity. This might seem hypocritical but is understandable. The government has adopted this stand to prevent people from panicking, hoarding, triggering another cycle of price rise and so on. Paradoxically, the overall inflation rate has been declining. For the first time in 32 years, our inflation rate has reached (-) 1.61 percent. Why?

In general, a negative inflation rate or deflation has serious implications. Deflation is not good for a country's growth as it translates into lower incomes from business, thus lower consumer activity and a larger inventory of goods. Consequentially, manufacturing activity slows down and the cycle continues.

Before analysing the causes of the situation, one needs to be well aware of the difference between inflation, or the rate at which prices change, and price levels A common mistake made by laymen and even media is that a lowering of the inflation rate is associated with a decline in prices. A positive inflation rate implies that prices are rising even if that rate has declined from previous levels. It is only when the inflation rate turns negative that one can say that prices have declined.

In June 2008, the inflation rate was very high at 11.6 percent mainly due to galloping prices of oil (in the international markets), power and manufactured goods. However, in the current past there has been a reversal of this trend due to recession in the world and domestic economy curbing Indian exports and causing a credit crunch. Incomes have declined, so has people’s ability to buy goods and services. The inflation rate has consequently fallen.

The failure of the monsoons seems to go against this trend. Though people have less to spend, their money is chasing much fewer fruits and vegetables as overall production has gone down by 20 percent. Thus, we are experiencing a scenario of overall low and even negative inflation coupled with a sharp rise in food prices.

The food grain wholesale price index (WPI) has gone up by almost 14 percent, and that for fruits and vegetables by 10 percent.

The steeply rising food prices pose a threat only to the poor and the government can tackle this threat through targeted steps. The others can pay for more expensive food through savings on other items caused by the continuing deflation. In any case, it is only the poor that spend more than 50 percent of income on food consumption. For the others, particularly the readers of this column, food consumption is not a major expenditure item.