No, low inflation is not always a good thing — here’s why
Yesterday, data released by India’s Central Statistics Office showed that India’s retail
Even wholesale inflation was a casualty, dropping to an eight-month low of 3.80% owing to lower prices of manufactured items.
On a daily basis, the average Indian household could see this as a good thing. Price growth is low, so that means lower expenditure on essential items like fruits, vegetables, pulses, gas, etc. However, this has many implications for the Indian economy and more importantly, investor and business confidence.
However, first things first:-
Where was inflation the previous month and at the same point in 2017?
Retail inflation was 2.33% in November 2018 ( the lowest point since June 2017 ) and a solid 5.21% in December 2017 - which was itself an outcome of higher housing and fuel prices.
Why is inflation so low?
This is largely due to low prices of food items, particularly onions and potatoes, and fuel. In fact, retail prices of food items actually fell by 2.51% reflecting the excess production from India’s agricultural sector.
Meanwhile, retail fuel inflation declined to 4.54% from 7.39% in November 2018 owing to the lower petrol and diesel prices. This was an outcome of the decline in global oil prices. In fact, global oil prices touched yearly lows in December 2018, owing to excess production by a number of countries like Saudi Arabia, the US and Russia and continued exports from Iran. However, with a supposed production cut by OPEC countries this year, inflation might have bottomed out.
Who does it really affect?
While lower food prices are obviously a welcome development for consumers, they can hurt rural incomes. Low food inflation directly translates into lower earnings for
What does it mean for economic growth?
This means lower consumption from rural India, weak economic demand and hence, lower economic growth. Last week, the Central Statistics forecast that
Low inflation also hurts people other than farmers. If businesses can’t raise the prices of their products, they can’t increase wages, which keeps income growth stagnant. Yes, your raise can get affected.
How will foreign investors and businesses react?
While a stable inflation rate generally makes a country an attractive proposition for foreign investors. However, if inflation is too low it raises concerns about a country’s GDP growth trajectory. Low inflation means less liquidity in equity and debt markets, which will cause investors to steer clear. Correspondingly, low price growth points to subdued consumer demand, which can discourage businesses from increasing capital expenditure.
What will the central bank do about it?
The inflation estimates are well below the Reserve Bank of India’s inflation forecast of 2.7-3.2% for the second half of fiscal 2019. The slowdown in price growth raises the possibility that the
It will do this in order to spur aggregate demand and consumer/business confidence by making loans cheaper. An increase in credit-fuelled consumption will provide a boost to the prices of items and economic growth as wages and profits rise. This, coupled with the RBI’s continued liquidity injection through purchases of government bonds, portend for a stronger GDP result in the final quarter of 2018-19.
More importantly, with an eye on elections, the government will likely try and sustain farmer incomes by providing price support for specific commodities as well as cheaper loans and an income support scheme.
Global oil prices are expected to tick up this year, but it remains to be seen if the increase will be substantial enough to drive inflation up considerably by the end of the financial year.
India’s retail inflation rate just hit its lowest point since June 2017, raising the prospects of a rate cut and more handouts to farmers
Reserve Bank of India surprises all by keeping interest rates unchanged
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