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Fall in food prices helps retail inflation ease to 4.6% in December

After a year of high inflation-low growth, a sharp dip in food inflation tames the headline number

Topics
Inflation | retail inflation | India's consumer inflation

Abhishek Waghmare  |  Pune 

food, vegetables, inflation, price rise
Although, a fall in inflation in the last month of 2020 was expected, the actual extent surprised the experts

The consumer price index (CPI)-based rate moderated to 4.59 per cent in December, down from 6.93 per cent in November and 7.61 per cent in October, which was a six-year high. This happened because of a sharp fall in food from 9.5 per cent in November to 3.4 per cent in December, the lowest since August 2019.

The decline in food was brought about by a favourable base effect in vegetables. In December 2019, vegetable inflation recorded its peak (under the current CPI series) at a staggering 60 per cent. Such a high base resulted in deflation of 10 per cent in the vegetables segment.

Rising further from 17.9 per cent in November, CPI inflation in oils and fats crossed 20 per cent in December 2020. Oils and fats have rarely displayed such a high inflation. Even during the high inflation years of 2012 and 2013, inflation in this segment had not crossed 20 per cent.

Overall, consumer inflation settled below 5 per cent for the first time since November 2019, and was within the Reserve Bank of India’s (RBI’s) target range of 2 to 6 per cent. In 10 out of the 12 months in 2020, was above the upper tolerance band of the RBI.

Though experts were expecting a fall in inflation in the last month of 2020, the actual extent was more than expected. But this drop may be a fleeting one, and may not radically affect the MPC outlook, they said.



“While the considerable softening in CPI inflation in December 2020 offers welcome relief, it is unlikely to prove adequate to allow for rates to be eased in the upcoming policy review, as headline inflation may only record a limited further decline before resuming an uptrend,” Aditi Nayar, principal economist at ICRA, said in a note.

Interestingly, core inflation, which measures growth in the consumer price index after removing the food and fuel components, is not moderating, and remained in the range of 5.6-5.8 per cent in the second half of 2020.

While supply-side constraints were the primary reason till now, growing demand as economic recovery firms up may not tame soon.

“With both global and domestic demand expected to strengthen with the roll-out of Covid-19 vaccines, core-CPI inflation may remain relatively sticky, and display a limited correction going forward,” Nayar noted.

The record jump in oil and fat inflation is concerning since India has a high import dependence with respect to edible oils, India Ratings said in a note.

Among other food products, inflation in milk eased to slightly below 4 per cent after remaining above that mark for a year. But that for other protein-rich food items like pulses, meat, and eggs, remained very high, at above 15 per cent.

Higher taxes on petroleum products are still impinging upon Fiscal stress may delay the reduction in fuel excise duties and state sales taxes, keeping elevated, said Sunil Kumar Sinha, principal economist at India Ratings.

Inflation in the transport and communication segment remained high at 9.32 per cent in December.

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First Published: Tue, January 12 2021. 20:00 IST
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