India’s retail inflation slipped to 0.25% in October, hitting the lowest level in 13 years. This data is based on the Consumer Price Index, which is calculated using the price changes for a basket of goods that we use.
Sharp fall in food prices
Food is one of the key components of this basket, and a sharp fall in vegetable prices has led to an overall decline in CPI.
In fact, last year vegetable prices were on a completely opposite trajectory, and that base effect is adding to this decline, making it look sharper. As a result, food inflation declined to (-)5.02% in October.
Gold prices surge
This CPI basket also has another big component – gold. Gold prices have been on a tear this year; therefore, gold inflation hit a record high of 57.83%. This helped keep overall retail inflation in the green. If we set gold aside, overall prices slipped into the deflation zone last month.
Inflation versus deflation
Now, what does that mean? When we talk about price changes in economics, there are three key terms: inflation, deflation and disinflation.
Inflation means rising prices. Disinflation means a fall in the rate of inflation – basically, prices rise but at a slower pace. Deflation, also called negative inflation, means a fall in prices.
Is deflation a big concern?
Coming back to the India question. We looked at the data and saw that India almost entered the negative inflation, or deflation, zone in October. You might think that’s a good thing, but it’s actually not if it persists for long. A fall in prices usually indicates low demand for goods and services, and that is a sign of a weak economy
RBI’s inflation mandate
In fact, in India, the RBI is mandated to maintain inflation in the range of 2–6%. Our October reading is well below the bottom end of that bracket. Therefore, many experts argue that the RBI should cut interest rates to support demand, and consequently inflation and growth.
Retail inflation: What next?
But India is not in the danger zone yet. As mentioned earlier, the fall in our retail inflation reading has been driven by high vegetable output this season and also the high base effect. This base effect is expected to fade in the next cycle.
Also, the October retail inflation data reflected the impact of the GST rate cut on prices. Since that is a one-time event, it is now out of the way.
But the next few months will be crucial, and certainly a major task for policymakers.
