Goldman sees deflation coming next month

India would see deflation or reduction in general price level from next month because of slackening demand,US-based financial services firm Goldman Sachs said....

India would see deflation or reduction in general price level from next month because of slackening demand,US-based financial services firm Goldman Sachs said.

Deflation can also come due to high base effect,an impact of high inflation last year on the current level of the rate of price rise,Goldman Sachs said. We expect yearly headline WPI inflation to fall rapidly below 1 per cent in March… and enter a period of deflation beginning in April,which could last till end-2009 due to not only continuing demand destruction but also a sharp step-up in the base, it said in a research report.

Dun & Bradstreet has also said that India might go into deflation by the beginning of April this year due to weak consumption demand and a higher base effect. There will be negative inflation for a few weeks in the first quarter of next fiscal,driven largely by higher base effect but we do not expect a pronounced deflationary trend in the economy, Dun & Bradstreet said.

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Inflation fell to over a six-year low of 2.43 per cent for the week ended February 28 against 3.03 per cent in the previous week mainly on account of a fall in the prices of manufactured products. The fall in yearly inflation numbers was likely to gain speed as a high base kicked in from last March,Goldman Sachs said.

It further said that in a deflationary environment,the sectors with a high proportion of variable costs were likely to benefit from falling input prices. In 2010,however,it expects inflation to come back due to both a gradual pick-up in demand,and conversely,a low base from 2009. On a month-on-month basis,all the major components of WPI inflation were already showing a deflationary trend.