STAGFLATION IS MUCH MORE DANGEROUS THAN INFLATION
Till the end of 2008
The rate of inflation on 7th
June 2008 was 11.66% say almost 12%. The end of January saw inflation coming
down to 3.2%. At this point of time people in general and Economists in
particulars were very happy. Even the Government felt relieved. But come last
week of February the smile turned into a grin. The inflation came down to 2.43%.
This was one of the lowest levels of inflation. Economist was not sure whether
it is a good sign or signal of incoming turmoil. People were confused to see
that prices of consumer goods have taken an upward trend. What is this? Price
of potatoes and onions came up by 20% in the month of March yet the official
figure of inflation has gone down. In fact inflation went down by 7th of March
to0 .44%. Never in the history of modern
Montek Singh Alluhwalia stoutly defended that lower inflation does not necessarily mean a state of deflation. He felt that economy might register lower inflation some time but out of such trend of inflation would rejuvenate the economy by creating fresh demand. Though, on a few earlier occasions, we had not agreed with the views expressed by him on the rate of growth of economy yet this time we tend agree with his utterance. Yes, lower inflation does not necessarily meant a state of deflation. What is the e meaning of Deflation? In common usage, deflation is generally considered to be "falling prices" while Inflation is "rising prices". Actually this is "price inflation" as opposed to "monetary inflation".
On the inflationary side we have rampant money creation, and rupee devaluation compared to other currencies. This is causing prices for food and energy to skyrocket.
On the deflationary side we have the sub-prime fiasco which is reducing liquidity for banks and causing housing prices to fall.
So there you have it, rising food and energy prices and falling housing
prices... inflation and deflation at the same time. Many economist feel
sooner of later the rate of inflation may come down to Zero. But do not panic.
Zero inflation does not mean disaster. The countries like
I am not afraid of deflation as such. It would balance out soon. What I am afraid of is stagflation. The simple definition of Stagflation is a "stagnant economy coupled with price inflation". This would be dangerous for our economy.
|