On the surface, the latest retail inflation data for India is not overtly comforting. At 5.69 percent, the Consumer Price Index (CPI) inflation in December 2023 was at a four-month high, though everything else seemingly suggests that the situation is far better than the headline number indicates.
The rise in inflation in December which, it must be pointed out, came in lower than economists' projection of 5.9 percent, was on the back of an unfavourable base effect. At the same time, core inflation eased to another multi-year low of 3.9 percent.
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But policymakers neither mourn nor hail a single month's inflation number. What matters is the trend. And, as far as India is concerned, 2023-24 has been about inflation easing after a difficult few years, thanks to the coronavirus pandemic and Russia's invasion of Ukraine.
Until the pandemic struck India in early 2020, it had been a fairly smooth sail for the authorities, with the adoption of the flexible inflation targeting framework – first, informally, in early 2014, and then, formally, in mid-2016 – doing what was exactly hoped as the CPI inflation dropped from 9.4 percent in 2012 to 4 percent or lower in 2017, 2018, and 2019.
A key driver of inflation – not just now, but always – has been food prices. But, with uneven and unseasonal rains becoming more commonplace due to climate change and impacting agricultural production, the role of the government in taking supply-side measures to contain price rise has become crucial. The RBI has gone so far as to say that "major reforms" are needed to the country's supply chains of perishable items such as vegetables.
Going forward, the RBI expects the CPI inflation to finally hit its medium-term target of 4 percent in the second quarter of 2024-25 before rising again towards the end of 2024.
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