The latest data, as measured by the wholesale prices index (WPI), show that the inflation rate was at 1.83 per cent for the week ended July 3-a 17-year low. But much of the decrease in prices is statistical, based on big increases in index numbers last year. The trends suggest that even if the WPI index moves up by 2.9 points between July and October, by end-October we could well see a zero rate of inflation. And that is not an unreal expectation, given that between April and July the WPI index has moved up a mere 2.2 points.

Ignoring last year, when vegetable (especially onion) prices rose abnormally, if one were to look at 1997-98 the WPI data show a rise of only 4.6 points between the first week of July and the last week of October. If that level of increase occurs this year, the inflation rate as at end-October will be 0.5 per cent.

Last year, theprices peaked in October, with the index moving up to a high of 359.8 (final figure) in the last week of October. As opposed to that, in the first week of July 1999, the WPI index was at 356.9, well below the level reached in October last year. This raises the interesting statistical possibility of achieving a zero rate anytime between September and October. From November 1999, however, the inflation rate should move up since the corresponding index numbers started declining rapidly last year.

But reality may not necessarily correspond to statistical probabilities. To take an example, in 1998-99 the WPI moved up 9.2 points between the first week of July and the first week of December. If that happens this year, the rate of inflation will be 2.3 per cent in the first week of December 1999. In 1997-98, a comparatively normal year, the WPI moved up 7.4 points (from 325 to 332.4) between the first week of July and the first week of December. That level of increase this year will mean the rate of inflation inthe first week of December will be only 1.79 per cent. Taking 1996-97, when the rise in prices during the period July to December was much faster, the WPI rose 12.3 points between the first week of July and the first week of December 1996. Even if we assume that a 12.3 point rise this year, that will mean an inflation rate of 3.2 per cent.

The lower inflation is not merely due to a higher base of index numbers in the previous year. If we eliminate the effect of the price spike in 1998 by taking prices over a two-year period, we find the following pattern for prices in the last week of June. In 1997-99-10.3 per cent rise; 1996-98-13.5 per cent rise; and 1995-97--10.4 per cent increase. This shows that there has certainly been a lowering in inflation, regardless of the spike in prices last year. This is in keeping with the trends of lower commodity prices, as well as the slowdown in the economy. Also important is the excellent rabi harvest, which has kept the rate of increase in primary commodity priceslow.

While commodity prices have bottomed out, they haven't really moved up much beyond that bottom--nor are they expected to do so this fiscal, with substantial excess capacity still in the pipeline. That is perhaps the reason why a spurt in oil prices hasn't even impacted the fuel segment of the WPI.

Kamal Sen, director at Anand Rathi Securities, points out that the core rate of inflation--that of manufactured products--has remained remarkably stable in the last three years: Four per cent in 1996-97; 4.2 per cent in 1997-98 and 4.5 per cent in 1998-99. That could easily double, once a full-fledged recovery is underway. For instance, in 1994-95, the index of manufactured products moved up 10.5 per cent. But it needs to be remembered that world commodity prices were not low then, nor was there any excess capacity.Given these circumstances, it is difficult not to agree with Ficci's position that the lower rate of inflation results in higher real rates of interest, and a reduction in rates is called for.This is especially true because, barring unforeseen circumstances, the low inflation rate is likely to continue, at least for the next six months.