Inflation is at two decade low but price no price down

Thursday, March 19, 20090 comments

Inflation is at 20 year low of 0.44%, but it doesn’t seem that it is low at all time because still vegetable, fruit, cereals and house rent is on there high. Recession effect can be seen everywhere, there are lay-off and salary cuts are going on every company. Still in commodity, reality and food market no one is ready reduce the price. Everyone is in amused state that why prices are not coming down even if inflation is at two decade low of 0.44%.

There are some reasons which affect the inflation rate which need to be considered before coming to conclusion. Drastic fall in inflation is also attributed to high base effect as it stood at 7.78 per cent during the corresponding week last year. It’s a misconception that falling inflation means falling prices.

DK Joshi, Principal economist at CRISIL explains, "Falling inflation rates doesn’t mean falling of prices, it only implies the rate at which the prices of goods are growing is low." Inflation rate has fallen to .44 per cent, the lowest in seven years, after breaching the 12 per cent mark in August ‘08. That means, at present, the prices of goods are higher than .44 per cent than last year. An example will make it clearer. Let’s say, the price of an item is Rs 100. It increases to Rs 106 with inflation at 6 per cent. Now, if inflation has slipped to .44 per cent, the price of the same good will move to Rs 108.57 from Rs 106, that is, 0.4 per cent higher than Rs 106. So simply put, inflation is a general rise in the prices of goods and services. When inflation rises, the prices of the goods rise. When inflation reaches zero, the prices on goods will become stagnant. And when inflation turns negative, you will see the actual fall in prices.By when is it likely to happen?"We can expect to see inflation close to zero by March-end and by May-June in negative. It is when we will see actual fall in prices of goods," says Joshi.

So we will have to still wait that inflation will get down to negative and we will see the old reduce price everywhere in market.
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