Retail inflation accelerates to 4-month high of 5.69% in December on base effect

CPI inflation of 5.69% highest in 4 months

India's headline retail inflation rate accelerated to a four-month high of 5.69 percent in December, according to data released by the Ministry of Statistics and Programme Implementation on January 12, thanks to an unfavourable base effect.

The Consumer Price Index (CPI) inflation print in November was 5.55 percent.

At 5.69 percent, the latest CPI inflation figure is below expectations, with economists having predicted prices likely rose 5.9 percent year-on-year in December.

An unfavourable base effect was the key driver of inflation in December, although the price momentum - indicated by the month-on-month change in prices - weakened. The Consumer Food Price Index, for instance, was down 0.9 percent month-on-month (MoM), aided by a 5.3 percent sequential fall in the price index for vegetables as prices continued to correct.

The slowdown in price momentum was visible in categories apart from food too, with the price index for housing - which makes up 10 percent of the consumption basket - contracting by 0.6 percent MoM in December. The other categories - clothing and footwear, fuel and light, and miscellaneous items - all saw their price indices rise by just 0.2 percent from November.

As a result, core inflation - or inflation excluding food and fuel - fell further to 3.9 percent from 4.1 percent in November.

The less-than-expected rise in retail prices in December will be music to policymakers' ears, with the latest inflation data the last one before the presentation of the interim budget for 2024-25 on February 1 by Finance Minister Nirmala Sitharaman, followed by the Monetary Policy Committee's interest rate decision on February 8.

The MPC has left the policy repo rate unchanged at 6.5 percent in its past five meetings, saying on December 8 that it remains resolute in its commitment to aligning inflation to the 4 percent target.

"Looking ahead, we forecast the CPI inflation to moderate appreciably to around 5.2 percent in January, aided by a dip in the food inflation print on account of an adverse base. Nevertheless, rate cuts appear distant, and are unlikely to emerge before August, with a stance change expected in the preceding policy meeting," said Aditi Nayar, chief economist at ICRA.