As all other things, anything extreme is bad. This is the same with inflation. If the inflation is high or if it is in negative it is bad. First, lets see what is inflation and how is it calculated.
Inflation measures how the index for a particular week looks vis a vis what it was exactly a year back for the same week. For eg: 0.44% inflation means prices for 1st week ending March 7 2009 rose by only that percent compared to that of March 7 week of 2008. It is a common misconception that decreasing inflation means that the prices are decreasing. This is not the case because inflation is the value by which the value has increased while compared to previous year. So if you want to see the prices falling then it would be the case when there is negative inflation.
Another term that is normally used along with disinflation is deflation. But both are completely different, even though one of them might lead to another. Disinflation is negative inflation. But deflation is even more dangerous. Deflation means falling economy. Disinflation only means falling prices, however the economy is still running but with a slow pace. Presently India is staring at disinflation and not deflation.
Anyway prolonged disinflation may lead to deflation. This can happen because when there becomes a predictablity of falling prices then everyone would like to postpone their investments as they would get the same at the lesser price by delaying it. This will start hurting the economy. So even though everyone may be rejoycing that soon the prices would be falling, smiles will be short lived. If the same continues we may be staring at deflation and if it doesnt then again its isnt good news.
No comments:
Post a Comment