Core inflation rate is still marginally positive

Inflation rate in India has gone into negative territory for the first time in over three decades. The rate of change in prices was minus 1.61 per cent for the week ended June 6. However, this is partly a statistical illusion because in the same week ending June 6 last year the inflation rate had suddenly jumped to over 11 per cent on the back of rising global commodity prices. So on a high base of June 2008, a negative growth in prices this year is not surprising.

Besides, if you disaggregate the wholesale price data, manufacturing inflation accounting for nearly 64% of the total basket is still in a marginally positive territory. It is food and fuel items, with 36 percent weight in the basket, which have gone negative. So the core inflation rate is still marginally positive.

So too much need not be read into the inflation rate going negative. This is definitely not a sign that the economy is still in a risk of deflation. The consensus view is the GDP growth for the economy in 2009-10 will certainly be higher than the 6.7% growth registered in 2008-09.

The inflation rate appears to be actually rising on a sequential basis i.e if you compare prices of food, fuel and manufacturing items today with what existed a month ago, the prices are actually rising. The point to point comparison can create some statistical illusion. Of course, there are myriad other problems with the way the inflation rate is calculated.

For instance India still follows three sets of inflation data. We have the Wholesale Price Index in which manufacturing has the maximum weightage and is used for official purpose. Then we have the consumer price indices for industrial workers and agriculture labourers, in which maximum weightage is given to food and fuel items. Both these indices are still showing an inflation rate of a little over 8.6% as of end April. Data on these come with a greater lag.

Consumer price indices for industrial workers and agriculture labourers have been much higher than the wholesale price index these past few months. It is most unlikely that even the wholesale price index will stay negative going forward. The rate of inflation will return to the normal 3 to 5% in due course.