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The Inflated Word called Deflation

22nd June, 2009

So I’m confused.

India fell into a spell of deflation – a good minus 1.61% of it, according to the wholesale price index compared to the same week last year! Now I remember Japan’s deflation nightmare in the 1990s (didn’t they hand out cheques to fellow Japanese to suddenly boost spending?). Isn’t deflation, like, the closest to hell (after whats happening in Iran, maybe)?

But then there are the nay-sayers. Like our very own RBI governer D Subbarao, who says that there is no concern of deflation. Although the wholesale price index is negative, there are certain parts of the index, like food articles, where inflation is significant, he said. Then why even have the WPI, if you’re going to dismiss its whole analysis anyways?

So, like I said before, I’m confused.

The Wholesale Price Index

I’d really like to conquer this Wholesale Price Index (WPI) business! Wikipedia, my friend, says its this (relative) price for a representative basket of wholesale goods, based on ’93-’94 prices. A nice big collection of goods (435 items if you really want to know!). So, a good look at the (Indian) Office of Economic Advisor’s website (http://eaindustry.nic.in) which publishes the WPI figures, gives a general idea of whats rising and whats not! You can really get into the nitty-gritties, but its best summarized by LiveMint’s article:

The annual rate of inflation, calculated on a point-to-point basis, stood at minus 1.61% for the week ended 6 June as compared to 0.13% in the previous week and 11.66% during the corresponding week of previous year.
However, food articles were costlier by 8.7% from the comparable week last year as pulses moved up 17%, cereals 13.5% and fruit and vegetables 10%.

Ok, makes sense. You take the price of some goods, find their relative cost to some base year, add in some weightages, and get yourself this bably score. And then trend this over some weeks / months / years, and if something news-worthy (read ‘sensationalist’) comes out, you blast it all over the media.

Umm, yup, so what?

But only some of these 435 goods ever affect me. There are many direct and indirect relationships that build up my current cost of living. And its not like the price of the chips packet I got today takes into account the price of iron ore or coffee beans as of today. The WPI is just an average change in prices – some goods prices will rise more, and some goods prices will rise less. Some just remain the same!

The point is – its not that I buy all 435 items, and that too all of them today. How is this even mildly associated with me? My rent doesn’t change weekly, and movie ticket prices have remained  the same throughout this year!

I wonder why people even use this inflation figure! It’s too macro for me to make any use of, and even if I zoom into single single items I’m not sure the correct wholesale price is correctly listed there! (Thats because of a common practice, that if the figure for a commodity isn’t available, the last available figure is used!).

So little and inconsequential, yet so much media space. Me thinks thats the problem! [P.S. I hate the media anyway!]

Postscript

A really interesting post-read: Businessworld’s article titled ‘Unmeasured Inflation’.

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4 Comments leave one →
  1. Surjodeb Basu permalink
    23rd June, 2009 2:04 AM

    it’s not that simplistic and incosequential either…
    In a free market economy (Note: India doesnt really fall in that category…) , if the prices of goods start falling across the board it basically indicates a reduction/loss in demand.

    Now, u cannot EVER be in doubt how dangerous that is!

    PS- one point i would strongly like to make here… for inflation or deflation, the prices of commodoties are only their indicators… (somewhat like symptoms)…whereas what worries people(those doing the analysis) always are the causes. I guess what i am trying to say is, dont focus too much on the prices…they are just indicative of the actual problems which worry those analysing the economy. (And of course, i dont need to add…they are not the common man.)

    • kranium256 permalink*
      23rd June, 2009 10:21 AM

      hmm .. interesting point!

      The WPI is an indicator, while the real causes are unknown. The media, oh the great media, will only highlight the indicator and not the true cause!

  2. 6th May, 2010 4:40 PM

    Well you’ve got one more follower to support you here. I don’t totally believe in figures that are supposed to be made by weightages or judgement of a select few. Sadly, even the Sensex is happy to tread a path along the Ambani bros’ (and a feew others’) businesses. What about the fellow who rubbishes the sensex performance and makes big bucks or loses a fortune? The Sensex figure may not be very worthy putting this fellow and the ‘overview’ into picture.
    All that said, it would be safe to point out that we do need the WPI for the generic overview. But we have to be cautious about how the media feeds it to us and more importantly, we should be able to judge it’s relevance in our lives.

    • 6th May, 2010 9:19 PM

      theres a huge disconnect between how important the media thinks something is, and how important it actually is! HUGE!

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