INDIA BATTLES INFLATION AS EUROPE FIGHTS DEFLATION
By Ruma Dubey
Two continents, two completely opposite problems.
If India is facing an issue of a stubborn and persistent inflation, Europe is staring hard at low inflation. But then, given the hullabaloo we have over inflation, which is rising prices, how can low prices of deflation ever be an issue?
Yesterday, India’s CPI numbers for December were a bit reassuring but this was thanks to a good harvest, following a good monsoon. January too, we could see a lower inflation rate; this is seasonal, happens every year.
On the other hand, prices in the 17 EU member states, which were using the Euro in 2013 rose in December at an annual rate of only 0.8% as reported by Eurostat, the European Union statistical agency. This figure did not include Latvia which adopted Euro since 1st Jan-14, was lower at 0.9% for November. But what has really got Europe spooked is that the core inflation for Dec’13 came in at 0.7% — a record low since the advent of the euro currency.
If RBI is working ion hiking rates to curb inflation, the European Central Bank (ECB) wants to work on hiking prices, bring up inflation to around 2%. It cut its benchmark interest rate to a record low of 0.25% from 0.5%.
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 just about looking up, is not good. 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. People feel that prices could come down further and hence wait. 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. The Eurogroup President has in fact stated that this worrying low rate of inflation is a sign that the region’s economy is recovering from its crisis. He has brushed it off saying that it is a part of the phase which is dealing with some of the macroeconomic problems. European Central Bank President Mario Draghi, who on Thursday left rates unchanged, said that December’s low inflation was due to a ‘technical’ change in data collection in Germany and expects low rates to continue for some more time.
There are some who say that recovery is yet to happen, given the YoY contraction in retail and automobile sales. The worry is that Europe should not get into a Japan like situation where persistently low inflation would push the country into deflation. It has just about started emerging out, with inflation finally showing an uptick. But it continues to deal with a falling yen, which is making imports costlier. Japan’s current account posted its largest deficit on record in November due to the weak yen. But the EU assures that it is certainly not going the Japanese way.
India and Europe have opposite situations but the central bank Chief’s in both the continents have acted the same way – status quo on rates – one for controlling inflation and another for deflation. ECB kept rates at 0.25% on Thursday and on 28th Jan, our Governor is expected to maintain rates too. Different people, different problems but same way of dealing with it?