Negative Inflation! Prices Falling?

The Inflation figures reported on Thursday were NEGATIVE. It has happened after about 30years.

So what does Negative Inflation mean? 1st some basics – What is Inflation? Inflation measures the annual rate of increase in prices (prices of what? goods/commodities in the list decided by the Govt.). So if the inflation is 2% for the 2nd week of June 2009 it means the price in 2nd week of June 2009 are 2% higher than the prices in the 2nd week of June2008.
So, in case of Negative Inflation it means the prices have come down.

But haven’t the prices really gone up in the last one year? then how come the Inflation rate measured by the Govt. is negative?
Well, the reason is becasue of 2 things – One the official inflation figures measure the prices of certain goods which are not co-related with the goods we “aam admi” (common man) use. Second, the prices are measured at the wholesale level and not at the retail level. So the profits of the distribution & retail channel kick in when the goods actually reach us.

So, What is the impact/effect of a negative inflation? Can I see prices falling in the days to come?
Ideally, prices should have fallen for inflation to come down. but negative inflation happens due to 2 reasons – either due to falling demand which makes produces reduce price or due to the large base effect.
In the second case, if the price of the good was irrationally high in the previous year and market for the good has now come to a more realistic level then we will see the price to be less than previous level.
Negative inflation DOES NOT mean the price is low, it just means that price (of whatever good measured) is lower compared to last year. So the price can be still at astronomical levels and inflation can be negative as seen currently in India.

Probably it is high time, Govt. realises the faulty measurement and rectifies it. But why has the Govt. not done anything on this? Probably because it is easier for the Govt. to control things at wholesale level rather than at retail (consumer) level. Govt. policies and benefits in most cases are not passed down to the end customer – the distribution channel eats it up and increases it’s profits rather than passing on the benefits of lower excise/customs duty & sales/service tax.

For now, stop worrying about inflation figures, it is not related to ground level realities. It is for the Babus and the economists to discuss about and for the Television Hosts to talk about and fill their 24Hr time slot.