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Inflation Watch

WPI inflation inches back above 3 per cent. Does this mark a reversal of the downward trend?

WPI goes up

Which way will inflation go? If it’s a multiple choice with just two answers, you had better bet on ‘up’. At least that’s what it’s beginning to look like, reversing a downward trend that Indian economy-watchers were beginning to doze off on (so predictable had it become).

Well, not any longer. It’s time to sit up, with widened eyes. The latest Wholesale Price Index (WPI) figures reveal that year-on-year inflation is now at 3.5 per cent. This is low, by India’s historical reckoning (remember the double-digit 1980s?), but is not as low as the 2.2 per cent that had been running for so long.

The point is not the single-point increase (it hardly matters, in itself), but the reversal of a long-assumed trend. Not to imply that inflation is going out of control or anything of the sort. Ever since Indian policymakers recognized the political sensitivity of this thing called inflation, no effort has been spared to keep it in check -- by voter demand, so to speak.

If inflation does rise in the coming months, be assured, it will only be by a few percentage points. Nobody expects a return to the dark days of double-digit inflation, so that’s not the issue here. Thankfully, the days of ‘stagflation’ (stagnating economy together with high inflation in an apparent paradox) seem to be well and truly over.

But why is inflation inching up at all?

Has the economy started recovering sharply? Alas, not. The likely reason, as cited by analysts, is the rise in prices of primary sector produce (vegetables, fruits et al) caused by the monsoon failure. Foodgrain prices are not much of a worry, thanks to the tonnes stored away in godowns (the huge forex reserves could be used to import the stuff, too, as a last resort).

So, that’s that, then? Yes. There’s no cause for concern, not even if inflation nudges 5 per cent or so. In fact, some economists even welcome a mild increase in inflation -- in the hope that it could stimulate the economy a little by giving producers some extra pricing power (and lowering real labour costs and the like). In any case, inflation is better than deflation.

The only thing that could alter the picture, however, is a burst of sudden inflation brought on by something unplanned for -- such as an oil shock. Best, then, to keep track of this risk as well. And this risk, like any index worth its name, keeps going up and down in real time. Stay tuned. Forewarned is forearmed.

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