The Big Picture – Low Inflation: Is economy back on track?

Summary:

• There is some good news in the economy front. The WPI has touched a new low in the past 5 years while the CPI has also come down.
• Inflation which has been the biggest problem for some years now, which also hurt the UPA government badly, is now softening.
• The low and stable inflation rate which is a requirement for stability in growth is now being seen.
• The lower inflation has also been backed by drop in Petrol and diesel prices to be followed soon.
• All these have raised the hopes of better economic growth in the coming months.
• This change in the inflation is said to be a result of global phenomenon which is due to the decline in the pressure of international commodity prices (particularly oil).
• WPI is no more an indicator at which policy makers are looking.
• From the past few years food inflation was driving the overall inflation rate.
• This decline indicates dipping in inflation rate and not a decline in prices.
• Such declines were also observed in the past which were short lived.
• Other indicators have not been good, particularly IIP.
• Due to fall in inflation rate, the industrial sector has been demanding a cut in interest rates.
• Base effect is also being observed.
• Sometimes, due the seasonal effect the prices of some food products tend to come down.
• Softening in the international commodity prices indicates that the world economy is not in such a good shape.
• The RBI checks if this drop in inflation rate is sustainable or not and then will go for cut in interest rates.
• Policy approaches have contributed to the inflation rather than counting it.
• Irrigation is the major area for state governments to invest as a capital expenditure.
• If food inflation is to be contained, efforts by the states are very much necessary.
• Government has to be willing to intervene in the process in which distribution happens to contain the food inflation.