Inflation has been the bane of the common man in India for as long as we can remember. Relentless rise in prices, especially food prices, have burnt a huge hole in the pockets of households. As is always the case with inflation anywhere in the world, the poor and lower income classes are affected the most by it. We at Equitymaster are quite clear that inflation is a curse and provides no overall benefit to society, no matter what some economists might say.
Now having said all this, there are signs that inflation might be on the way down for a long time. There are many reasons to be hopeful. One of course is the fall in crude prices. This is a big positive which will have a dis-inflationary effect across various industries. However, a major reason is also the global fall in food prices. The Food and Agricultural Organisation (FAO) measures global food prices by way of the FAO global food price index. The index which has risen relentlessly over the last decade is finally running out of steam. It was down 1.7% in December 2014 over the same just the previous month. Experts believe this could be the start of a global fall in food prices.
In India too, the below normal monsoon last year did not have a very adverse effect on prices. If the government can curb hording activities this year and if we have a good monsoon; food prices could see a sharp fall. As food contributes about 50% of consumer price inflation (CPI), this bodes well for possible rate cuts by the RBI in 2015. Lower interest rates are positive for economic growth. If higher growth results in higher wages and goo job creation, the Indian consumer could find himself in a sweet spot due to increased purchasing power.
We must not get too ahead of ourselves at this point. Hopes of low inflation have been dashed before. However, this time around there is reason to be optimistic in this regard. With the tailwind of falling prices around the world, it is now over to the government to ensure that the common man in India too benefits from this trend.