Deflation can be a concern even if it is not in final goods

Echoing the Finance Ministry’s concerns over deflationary trends in the economy, the country’s Chief Statistician TCA Anant said it is largely in primary and intermediate goods and not retail items.

Stressing that inflation has come down and prices are largely in control, Anant in an interaction with BusinessLine said that inflation in onions is largely due to seasonality, but high prices of pulses pose long-term challenges. Excerpts:

The Finance Ministry has raised concerns over deflation as WPI has been negative for the last 11 months. Do you agree with the Finance Ministry’s views?

The deflation in wholesale price index (WPI) is a matter of concern because there are a significant number of manufactured and primary products whose prices are declining.

WPI’s coverage includes a spectrum of commodities, which are traded in the wholesale markets. It doesn’t cover services. This includes both items of final consumption — those which enter the household consumption baskets, as well as a vast number of primary materials and intermediate goods.

For the people who are involved in manufacturing these commodities, a fall in price would squeeze their margins because production takes time. That is a matter of concern, as normally you see no inflation or low levels of it.

Deflation can be a source of concern even though it is not, in aggregate terms, in final goods and in the consumer basket. Items of food consumption are still seeing positive inflation but there is a set of items which is seeing negative inflation and that can be grounds for concern.

Over the past few months, there have been differing trends in WPI and CPI. How do you explain it?

The differing trend is because of the basket that the CPI and WPI cover. CPI covers only goods and services that enter into the consumption of households. WPI covers a much wider basket of commodities which are traded in the market. A different trend can emerge and did emerge in the past depending upon which set of commodities are seeing rises in prices and what are not seeing rises in the prices. That is the reason why we are seeing differing trends.

Consumer food price inflation has remained largely moderate except in items like onions and vegetables. Analysts say this is a sign of good food supply management by the government?

It is difficult to infer any conclusions from data of a one month period or even that from five months. You need data of a much longer time series. But in food price inflation, there is a high element of seasonality, especially in prices of vegetables and fruits. This is evident in the prices of onions. In the case of pulses, I think it is a more long-term problem.

Do you expect a sharp spike in food inflation due to the two consecutive years of poor monsoon rains?

As I have said before, how the monsoon will impact will depend on the production and availability of crops. Also, a lot depends on the capacity to manage shortfalls in the crops affected. For some crops, the capacity is there, while it is not so for other crops. But in general, inflation has come down and prices are in control.

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