Chimera of falling prices and reality of house budget

Inflation slows down to 3.54% in July

- Jayanta Roy Chowdhury

The inflation rate has slowed down to 3.54 per cent in July lower than the RBI's baseline target of keeping inflation below 4 per cent.

The food inflation has also seemingly tapered to 5.42 per cent. The RBI's monetary policy committee, which had kept key bank rates on hold at its last meeting, may well use this to reduce interest rates, arguing inflationary bull has been caged.

Cause for joyous cheers? Not really.

There are three reasons why we need not celebrate. Firstly, the inflation is calculated on a year-by-year and last July was terrible for price increases. The consumer price index, which is the inflation rate economists take into reckoning, had risen by a huge 7.44 per cent in July last year while the food price index had risen by a phenomenal 11.51 per cent.

The slightly slower rise in this year's July reflects what is called the "base effect", which means the lower rates are not because prices have fallen but because the point of reference was too high.