Inflation brings cheer and gloom

India cheered the recent cool-off in inflation, but in the developed world, very low rates of inflation or, worse still, deflation – a fall in the general price level – continues to remain a worry. And central banks in these countries are concerned about prices failing to pick up at the desired pace.

Take for instance the crisis-ridden euro zone, which reported a tiny 0.3 per cent rise in prices in September compared to the year-ago period. During the current year, inflation in the region has averaged only 0.5 per cent, much below the European Central Bank’s medium-term target of 2 per cent. The euro zone includes 18 countries, including Germany, France, Italy, Portugal and Spain. The UK too saw its inflation rate ease to 1.2 per cent for the year until September. This is the lowest in five years and below the Bank of England’s target of 2 per cent.

In the US too, the seasonally-adjusted inflation rate in August (compared to July) declined 0.2 per cent, the first time since April 2013.

In India, the inflation rate (based on consumer prices) fell to 6.5 per cent in September, beating expectations. This was a significant cool-off from the 8 per cent averaged until August this year and the lowest since the new CPI-based inflation index was introduced a little more than three years back. A slower rise in the price of food articles such as vegetables, compared to the past, helped. The decline has also raised hopes that the Reserve Bank of India’s aim of bringing down the inflation rate to 6 per cent by January 2016 may be achievable.

Sharply rising prices, particularly of essential food items, have been hurting Indian households for quite some time now, in turn depressing consumption demand. Also, with inflation hovering at high levels, the RBI has been cautious with interest rate cuts, which would have helped bring down borrowing costs for the corporate sector.

If low inflation is good, why do Europe and the US seem to be bothered by their anaemic inflation rates? This is because a certain amount of price increase is supportive of growth. In an economy where prices are expected to trend downwards, consumers put off spending and companies do not have much incentive to invest. Overall economic growth takes a beating. Also, deflation makes debt payments more expensive – adding to the pain of the many deep-in-debt European governments.

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