Retail inflation rises to 3-month high of 1.33% in December; economists split on February cut

Inflation for December

• India's inflation rose to 1.33% in December, highest in three months
• 2025 inflation averaged 2.2%, lowest in a decade due to lower food prices.
• CPI base year shifts to 2024 from January, raising non-food weight in the index

Did our AI summary help?

India’s inflation firmed up in December, rising to a three-month high of 1.33 percent from 0.7 percent in November, government data released on January 12 showed.

Even with the uptick, headline inflation has now stayed below the Reserve Bank of India’s lower tolerance threshold of 2 percent for four consecutive months, underlining how price pressures have cooled meaningfully since the middle of the year.

For the year as a whole, inflation averaged about 2.2 percent in 2025, making it one of the lowest readings seen in over a decade, helped largely by a sharp easing in food prices.

December also marks a transition point for India’s inflation statistics. It is the final consumer price index (CPI) reading under the 2012 base year. Starting with the January print — due on February 12 — the CPI series will shift to a new 2024 base, with an updated consumption basket that includes more items and assigns a higher weight to non-food components.

The change is significant because the current CPI is heavily food-weighted, with food accounting for more than half of the index. This makes headline inflation highly volatile, as sharp swings in vegetables, cereals or pulses can move the overall number even when non-food prices remain stable.

In December, food deflation continued for a seventh consecutive month, as fall in the food index narrowed to -2.71 percent compared with -3.9 percent the previous month.

The decline was led by cereals, which fell into deflation of 0.5 percent for the first time in 51 months, while vegetables and pulses continued their deflation for 11 consecutive month.

Oils and fruits, on the other hand, were at a 15- and 16-month low, respectively.

At the same time, pockets of stickiness remain, particularly in personal care and services, which also account for gold and silver jewellery.

“Core inflation (CPI excluding F&B, F&L, and petrol and diesel for vehicles) jumped to a 28-month high of 4.8 percent in December 2025 from 4.4 percent in November 2025. However, this was largely led by precious metals; core CPI excluding gold and silver remained unchanged at 2.4 percent between these months,” said Aditi Nayar, chief economist, ICRA.

Personal care inflation at 28% was at its highest level in series, even as other items like household goods and services, health and transport were at multi-year lows.

A higher non-food weight in the rebased CPI is expected to make future inflation readings more reflective of broader demand conditions and less prone to food-driven spikes and collapses, though it could also make services-led inflation more visible.

RBI policy implication

With headline inflation running well below target and core pressures easing, the data strengthen the RBI’s case for delivering another 25 bps rate cut in February meeting.

"We expect the next month’s final policy for FY26 to opt in for a 25bp cut in policy rates which may be the last easing in the current cycle by the MPC," said Paras Jasrai, associate director, Ind-Ra.

However, not all agree. Economists contend that the central bank will likely wait for clarity from the rebased CPI and GDP series before recalibrating its medium-term inflation assessment.

“While the December 2025 MPC minutes suggest a possibility of another rate cut in February 2026, ICRA believes that a pause is warranted at the current juncture. Besides, it would be prudent to wait and assess the updated CPI (base: 2024) and GDP (base: 2022-23) series, which are due to be released later in February, as these will determine the current growth-inflation mix and aid in forming a fresh outlook, said Nayar.

Economists contend that inflation is expected to move higher in coming months.

“With the favourable base effect fading away, the retail inflation is expected to pick-up from 4QFY26 onwards. Ind-Ra expects the inflation to average 2.6% in 4QFY26 ,” said Jasrai.