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Charts & Analysis

Yet Another Inflation Update

Time for an inflation revision. Latest is -1.58%, but the graph doesn’t look like it’s falling very much. (Click for a larger image)

Yet Another Inflation Update

What’s interesting is the past revisions – for nearly three months ago – are higher than one thinks, making the graph a very spiky one. What might change things? A massive change in oil prices, for one, or the dollar dropping 10-15%. Plus, there’s the bad monsoon – though I think there’s been enough hoarding to last us a while.

The 10 year bond yield, meanwhile is at 7.09% – I don’t know how I’m still positive on the gilt fund, but it’s still on a plus for me, and I’ll probably redeem it pretty soon if the prices go much lower. I’m still not convinced we’ll inflate, or that the crisis is over.

People say inflation is a mislabelled thing, look at the price of sugar etc. But inflation considered is always urban, and urban people have far lower food based expenses than rent, travel, clothes, wages and clothing – none of which have increased much. Some of them have gone down. I used to think it was only gadgets – now it’s in everything.

There’s a call for a better inflation index than the WPI – and it’s a work in progress, as the Urban CPI. Of course, I hope we don’t do the U.S. makeover by introducing “substitution effect” (People will eat jaggery when sugar is expensive, so let’s use the jaggery price instead), hedonics (“You get a better computer for the same price today, so let’s put a lower price instead, to reflect the betterness”) or Core CPI (“Oh, Food and Energy are impacted by factors other than the country’s real economics, so let’s ditch them and report CPI”). (Read this link) OH, and the gloriously insane “We’ll take housing inflation as equal to the rent an owner may get, instead of the actual increase of price of the house”. The US managed to get great GDP growth in “real” terms because of the low CPI numbers.

I don’t even know how India calculates GDP growth – but if we’re factoring WPI then this year will definitely yield 6.5%. We’re not saints, I think it’s more important for our folks to keep inflation high rather than to see it close to zero. However, the next few months will be critical even for WPI; at the rate we’re going, we’ll see headline inflation in two months.

  • Anonymous says:

    >Why is inflation good for a debt-light savings-heavy Indian economy? To spur investment and deployment of money into projects? Well, that should be done by ensuring good conditions and providing incentives other than loose money policies. We already have a lot of unsatisfied demand for "stuff" – its not like we need to spur demand in any sector? Its not like deflation here means catastrophic retrenching by the consumer?

    Isn't 6.5% growth with 2% inflation better than 9% growth with 7% inflation?

    You can tell I hate inflation especially the kind produced by manipulating currency.

  • Bingo says:

    >@Anonymous, I think what Deepak meant is that the measure of inflation should be high, not that the real inflation should be high.

    If you are aware of the context, the Government has just changed the way inflation is "measured". Now, the same change in prices would give a low WPI change when food prices are high which is the situation right now. This will increase the reported inflation adjusted GDP rise but it does not mean that the economy will start doing any better. Government will get a reason to pat itself on the back without doing anything.

  • The Green Man says:

    >Even GDP is not a good measure of economic growth. Warren buffet sometime made a statement that with his money, he can hire 10,000 people to sit down and draw his picture everyday and that adds to the GDP numbers.