Inflation Check. Deflation dragon rears its head

For investors around the world, a new enemy emerged in 2014 — deflation. Consumer prices across the globe plummeted, signalling falling demand and failing economic recovery.

The annual inflation in Europe dropped to 0.3 per cent in November, a five-year low. In the US, CPI rose by just 1.3 per cent in November, down from a mid-year high of 2.1 per cent. In India too, there was a sharp decline in inflation rate. The WPI hit zero in November and CPI eased to 4.38 per cent versus 8.79 per cent at the beginning of the year (11.2 per cent in November 2013).

The fall in consumer prices was led by a decline in oil and food price. Brent crude slipped over 40 per cent during the year. Rising global supplies amid weakening demand from the big importers, including the EU and China, dragged oil prices down. And when OPEC members refused to cut production even after prices dropped below $60 a barrel, the oil market was hit by a shock and investors went short on oil futures in commexes, taking prices to a low of $58.5/barrel (Brent crude) during the year.

In food, the drop in price followed anticipation of a bumper harvest in grains, increase in output of oil seeds and milk/dairy products and demand not being large enough to consume the additional supplies.

The FAO Food Price Index, a measure of the change in international prices of a basket of commodities, of the United Nations, hit an 11-month low in October. World cereal production, which increased 9.5 per cent in 2013-14 to 2,526.1 million tonnes, is anticipated to be strong in 2014-15 too, with wheat production reaching a new record. In oil crops, the estimate is that soyabean production will surpass the 2013-14 record, thanks to excessive supply in the US and the ideal climate. In milk, the United Nations estimates that production will rise to 792 million tonnes in 2014, from 773.4 million tonnes in 2013 (and 762.3 million tonnes in 2012).

Of the several components of the FAO Food Price Index, milk and dairy items saw the steepest fall in 2014. The FAO Dairy price index touched 178.1 points in November, down 29 per cent year-on-year.

For milk, 2013 was also a good year, so the market already had large inventories when it moved to 2014. The estimates of an increase in production in 2014 again thus weighed on prices. And with demand for dairy imports from China and Russia dropping, prices were under more pressure.

In India, the fall in inflation was not led by the same items that drove the international commodity market into a bear territory.

In the food basket, if we take milk, for instance, inflation was at 10.2 per cent in November (versus 9.1 per cent in November 2013), only a tad lower from the year-high of 11.7 per cent seen in August — a contrast to the picture in global markets. In cereals, the rate of increase in price was down, but not significantly while pulses saw a price increase. Why this disparity? According to Madan Sabnavis, Chief Economist, CARE, “We will be affected by prices only to the extent there is international trade taking place in a commodity. It is domestic demand-supply conditions which drive Indian prices.”

Milk is a case in point here. RG Chandramogan, Chairman and Managing Director of Hatsun Agro Product, says, “We are self sufficient in milk and international prices don’t change the variables here. Inflation in milk prices this year was because dairy farmers faced the heat from increasing feed prices and procurement prices had to be increased…”

In fuel, however, despite large import dependence, prices haven’t come down much. While globally crude oil prices are down 46 per cent since June, in India petrol prices are down only by 10 per cent. There are two reasons for this — one, rupee has dropped from 59 in June to 62 against the dollar by November and, two, the government hiked excise duties, making oil companies give away less benefit to consumers in the form of price cuts.

So, what helped bring down CPI in India? It is the favourable base plus drop in vegetable prices and the rapid fall in the rate of increase in fruit prices. To an extent, the softening of fuel prices also helped.

In November, vegetable prices were down 10.9 per cent (in the same month last year prices rose 61.1 per cent). In fruits, inflation was 13.7 per cent, down from 22.9 per cent in May. But all this is just a correction, says Sabnavis. “After two successive years of over 10 per cent CPI, what we are seeing now is only a correction.”

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