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Economy

Inflation at 6.61%, going lower

Inflation has now reached 6.61% for the week ended Dec 6. It is likely to go lower, from reduced petrol prices, interest rate cuts and drop in global crude prices ($36 and not quite counting).

Here’s the inflation chart – the current WPI index, with some trend lines.

The Index has shot up dramatically in the l year, and in the fourteen years of collected data I have never seen deflation. Yet, it looks more and more evident now.

If the index drops below it’s last-year number, we are looking at deflation; and if prices continue to drop at the current level the earliest we will see deflation is March 2009.

If the index recovers to the long term trend we are still likely to see some period of deflation, sometime around May 09.

But if we continue at this pace, we are likely to see deflation for a substantial part of 2009, going on towards 2010.

What can reverse this trend? The rupee depreciating substantially against the dollar, making our imports very expensive in rupee terms and thus, raising prices. With the printing presses running at full speed in the US, this may not seem likely – but this market doesn’t care about “likely” anymore, so there’s one inflationary risk.

(Also inflation could happen due to a commodity price spike. Commodities are lower than they have been in a long time; but there’s not much reason for them to rise until we are past the global recession)

Second, that our RBI cuts rates and rate cuts DO stimulate the economy. I do hope this does happen. The current situation looks very bleak – we are looking at a MASSIVE number of white collar jobs going out of business.

But if this does happen, expect massive dollar inflows – the world is likely to stay in recession for a long time, and money will flow to wherever there is the best return. Any which way we look we are going to be faced with white collar job losses, and an increasingly bleak outlook on the global front.

One thing that will change everything, and I don’t know which way: A war. Now *that* is very likely.

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