The Wholesale Price Index (WPI) for May, which shows us the inflation at the producer levels came in the negative. It was at -3.21%, much much lower than the estimates of -1.2 to 1.5%. This was the peak of the lockdown and the prices indicated that people bought only essential items and those showed an inflation – mainly food which was at 1.13%. The biggest contributor to the fall in WPI is the fuel - crude, petroleum and natural gas slumped 46.21%. Naturally, with everyone goign for work from home (WFM), what did one expect?
So now everyone is talking about deflation. For us Indians, where rising price is an issue, we cannot help but wonder why this hullaballoo about deflation? Well, just as inflation has risks of an overheated economy, deflation poses risks of a cooled off economy. Deflation in simple economics means falling prices; so isn’t that a good thing? After all, everyone loves it when prices fall. But deflation in these times, when things are not good, does not bode well.
Just as inflation reduces the value of money, deflation increases the value and thus people do not want to spend it, prefer to sit on the cash. Companies are also likely to sit on cash as they feel it is less profitable to produce as it gives them lower real returns. They cut down on production and new investments and spike up unemployment. Thus deflation feeds recession which is what led to the Great Depression.
Well, we are not getting into a deep recession like that, that’s for sure. Inflation can be pro-growth but only when it is not unusually high where then it starts working like the way persistent deflation does. There are many who feel that WPI will persistently remain in the deflationary trajectory and this in turn will percolate into CPI too.
Now that is most certainly not happening. Companies, initially to bring down the inventory might offer steep discounts once they sense that people have started buying. Also, the lockdown has been lifted and fuel prices are being hiked consistently, day after day. Not the entire work force but some have started commuting and working. So the main component which go the WPI into the negative, the fuel part, will start going up and that is bound to push the WPI up.
This deflationary WPI is not here to stay and neither is it going to make the CPI deflationary. RBI has long ago stopped depending on the WPI to make any policy decisions. So is the WPI data useless? Not at all; under normal circumstances it gives a peek into the manufacturing inflation but now, it gives a peek into the how bad things really were during the lockdown and how India simply cannot afford to have another lockdown despite the growing cases.