"The newspapers say inflation is falling, but I don’t see prices coming down anywhere," says a concerned voice in the suburban train in Mumbai. It’s a common misconception that falling inflation means falling prices. That's not however how things work.
DK Joshi, Principal economist at CRISIL explains, "Falling inflation rates doesn’t mean falling of prices, it only implies the rate at which the prices of goods are growing is low."
Inflation rate has fallen to 0.44 per cent this week, a historic low, after breaching the 12 per cent mark in August ‘08. That means, at present, the prices of goods are higher by 0.44 per cent than last year.
An example will make it clearer. Let’s say, the price of an item is Rs 100. It increases to Rs 106 when inflation is 6 per cent. Now, if inflation has slipped to 0.44 per cent, the price of the same good will move to Rs 106.47 from Rs 106, that is, 0.44 per cent higher than Rs 106.
So simply put, inflation is a general rise in the prices of goods and services. When inflation rises, the prices of the goods rises. When inflation reaches zero, the prices on goods will become stagnant. And when inflation turns negative, you will see the actual fall in prices.
By when is it likely to happen?
"We can expect to see inflation close to zero by March-end and it could turn negative by May-June this year. It is when we will see actual fall in prices of goods," says Joshi.
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