The prime minister’s assertion that inflation will decline to 6 per cent by December

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may well come true – not just because of a good monsoon but, equally, as a result of a statistical inevitability.

The drop will take place even if prices in general stay at the high levels where they are now, when inflation is ruling at 10.5 per cent.

This is because of a phenomenon called the base effect, which simply underscores that the rate of inflation depends on the value of the wholesale price index on which the extent of the rise in the index in a year is calculated.

To understand that better, take the month of June in four successive years — 2007, 2008, 2009 and 2010. The wholesale price index in the month in 2007 was 212.3, and in June 2008 it was 237.4.

This indicates that inflation in June 2008 was 11.8 per cent. It’s a simple derivation, being the percentage change in the index from June 2007 (this is the base) to June 2008.

Now, the index in June 2009 was 235, which was lower than the June 2008 index at 237.4 (again, the base). That is why June 2009 saw a negative inflation of 1 per cent.

Similarly, the index in June this year was 259.8, indicating an inflation of 10.5 per cent over the June 2009 base index of 235.

We will get into a possible December 2010 scenario in a while, but first a few facts about inflation:

1) Inflation is not a direct measure of prices but the rate at which prices have risen over a period of one year.

2) The wholesale price index is an indicative weighted figure that captures the actual prices of all items. But it still does not tell you how much you must pay for a kilo of mustard oil today.

3) More importantly, as has been said in the foregoing paragraphs, inflation is also a function of the base value of the price index.

Now, when the prime minister speaks of inflation at 6 per cent in December, what he means is that the price index will then be 6 per cent more than what it was in December 2009.

Let’s see how this can happen. In December 2009, the index was 248.3. With the base effect kicking in, the December 2010 index is expected – at least by the prime minister – to be 263.2.

This has to be seen in the context of the last available index and inflation rate – 259.8 and 10.55 per cent, respectively, in June this year. A drop from there to 6 per cent by December, therefore, is as rosy as it can get.

But if you look at the price index of June this year and its expected level by December, you will figure that you are paying around the same prices, maybe a wee bit more, for anything you buy. Thank the monsoon and the base effect for the small mercy.

The hypothesis may not work if the prices go stratospheric despite the good monsoon, in which case even the base effect will be nullified. That may not happen, though.

falaknaazsyed@mydigitalfc.com