Oh dear! Lower inflation doesn't mean lower prices

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Sanjay Singh and James Jose | 14 Mar, 2009
Alpana Singh, a homemaker in north Delhi, should be rejoicing that India's annual rate of inflation has fallen to a six-year low. Instead, she is ruing that her household budget has hit the roof.

If the galloping prices of groceries were not enough, she is having to face a double whammy - the fee charged by her daughter's school has been hiked by Rs.8,000 a quarter.

And with the freeze on her husband's salary, thanks to the general economic slowdown and drop in corporate earnings, she is left with no money for that weekly outing with her family, let alone for savings.

"I was spending Rs.800 or so a week on groceries a year ago. Now, it's touched Rs.1,000. So this hype about inflation rate touching six-year low and all that mean nothing to me," says Singh. "We have stopped eating out and postponed our vacation."

Her case is similar to most people we spoke to. The lower inflation rate - which fell to 2.43 percent for the week ended Feb 28, based on official wholesale price index - has not translated into a respite to the average citizen.

Economists explain the reason - lower inflation rate only means the rate of rise in prices has come down, not the actual prices.

The ground reality is that if onions cost Rs.15 a kg a year ago, they cost Rs.18 now. And even the official data points out that prices of fruit and vegetables have risen by two percent in the past week alone.

Economists say wholesale indices are not fair representations of a prevailing price situation and that a more realistic picture is presented by retail prices that are taken into account while compiling the various consumer price indices.

"The consumer price index is not falling. This is the cause of concern for our economy. Actually this is a bad sign for the economy," says Siddharth Shankar, economist with the New Delhi-based financial services company Kassa.

In fact, the inflation rate as measured by consumer price index for industrial workers, which seeks to represent the impact of retail prices on the country's workforce, had risen to 10.45 percent in January, compared to 9.7 percent in the previous month.

Similarly, consumer price index for urban non-manual employees suggests that the annual rate of inflation in 59 Indian cities had been 9.8 percent in December, the latest month for which data is available.

In fact, the disaggregated data further suggests that the inflation in food and beverages was 13.4 percent - sharply higher than the single-digit inflation as reflected by data on the wholesale price index.

Dalip Kumar, the head of projects at the National Council of Applied Economics Research (NCAER), a Delhi-based think tank, says the wholesale inflation rate is down due to lower prices of non-food commodities and manufactured products.

"Going by the inflation data, it seems we could go below zero. But I still have some reservations at the present rate as the food commodities continue to remain at the higher side," said Kumar.

D.K. Joshi, principal economist at the credit rating agency Crisil, shares the viewpoint and says that since the wholesale price index had risen comparatively faster last year, the low rate now is more of a statistical effect.

"The base effect is very strong. The inflation should fall further. It can even reach zero," he says, and adds: "But don't count on actual prices falling."

This explains why onions continue to cost more than what they did a year ago, and more and more households find that their grocery budgets are persistently going up - unmindful of official statistics.