Home > Finance and Economy > In Negative Zone- Impact

In Negative Zone- Impact

It’s Friday evening, had enough work to complete, but somehow could not concentrate as much as necessary. Probably I was done for the day, but had to follow the strict office timings, so could not leave for home either. As usual I started browsing economictimes.com. I was stuck on an article, In Negative Zone. It said Inflation dipped to minus 1.55 per cent for the week ended June 27, 2009 from -1.30 per cent in the previous week. I don’t know how CPI/WPI is measured when the fall in inflation has been reported despite increase in the prices of food items and other commodities.

Falling Inflation.. Rising Deflation

Falling Inflation.. Rising Deflation

Economists believe that deflation is even more worrying than inflation. Falling prices trigger a cycle of lower spending as lower demand sets in, thus hampering growth. Now as the consumer put back spending, manufacturers cut production and start cost cuttings. Companies are forced to sell products at cheaper prices causing decline sales and profit. Because of all these, jobs start vanishing from market and those working are in fear of job loss or have to bear pay cuts. Also fall in salary increase burden the one caries in the form of various loans. Investments in equities and share market also get affected because of deflation. As production declines, companies start losing their sheen which is reflected in share their prices.

Deflation Cycle Chart

Deflation Cycle Chart

Apart from the above, deflation also affects our Dearness Allowance (DA) component in pay which is employer’s effort to compensate against price rise and is normally a certain percentage of our basic pay. Because of inflation this component is revised annually, but on deflation setting-in, this component will be knocked off first.

I remember that last July-August (’08) consumers were horrified because of inflation as it was breaking all previous heights and this year we are still worried because of downslide.

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  1. July 14, 2009 at 4:57 am

    Hmmm…interesting .. especially I like the graph part !

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