The good news is that there is no bad news in Tuesday's wholesale price index (WPI) number, which shows a fall from 7.25 percent to 6.87 percent.
The bad news is that the good news is not for real. The price fall is not happening for the right reasons. July's WPI inflation is down because last July the index had soared to 9.36 percent on the back of changes in fuel prices in June, especially petrol and cooking gas.
This time, it is the lack of change in fuel prices that is making the 'Fuel and Light' part of the index - accounting for nearly 15 percent of the WPI - look good. Of the three fuels - petrol, diesel and LPG - only petrol shows a rise of 8.64 percent. The other two are showing zero or less than 1 percent increases in July.
This is indicative of a lack of reform in energy pricing - among other things.
But, on the other hand, core inflation is going up. Manufacturing prices - which is what the Reserve Bank considers "core inflation" - are beginning to rise again, in the WPI have risen to 5.58 percent in July, up from 5 percent in May and June.
Does this mean industry is again able to pass on price increases to customers? Or is it some blip that will get ironed out when the WPI is revised for July?
We can't know how it will all pan out, but the inflation score in July looks like this: primary articles (weight in index: 20.1 percent), food (weight: 14.3 percent) and manufacturing inflation (weight: 65 percent), are rising, but fuel and light (weight: 14.9 percent) is falling due to a lack of reform.
In the months ahead, inflation would depend on the following:
One, how food prices behave, depending on monsoon trends in the remaining part of the rainy season. The chances are these will rise.
Two, how the government deals with energy prices. Assuming it does nothing, we will have a higher fiscal deficit - and that could store up inflation for the future. But maybe not this year, when industry is anyway slowing down.
Three, whether industry stagnates in the remaining three quarters of the year, slows down or revs up due to a fiscal-cum-monetary (rate cuts) stimulus. If it is the latter, inflation will worsen.
Four, what the government will do on taxation to make ends meet. If the government raises more revenue from disinvestment and spectrum sales, there will be no major impact on prices. If, on the other hand, it raises taxes on goods and services, it will impact prices.
Five, the base effect. The WPI began trending down from December last year - it stayed elevated between August-November 2011. This means the base effect will be available for four more months.
Six, consumer prices. The real inflation number that is important to you and me is the Consumer Price Index, which is still in double-digits. Will this come down? To bring down inflationary expectations, this is the number that needs to fall - and sharply by 3-4 percent. There is no sign of that.
Taking all these factors into account, the chances are the Reserve Bank will take the opportunity to cut interest rates latest in its September mid-quarter review.
After that, all bets are off. If the monsoon worsens food prices, and if the government feels compelled to raise minimum support prices in a semi-drought year, we are heading for higher inflation next year.
And remember, next year we are going to see an election budget. This government has not really got its arms around inflation. It is now likely to push for growth in the hope that higher incomes will teach the people to live with higher inflation.
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