Retail inflation surged to an over five-year high in December on the back of rising food prices, breaching the Reserve Bank of India’s (RBI) upper tolerance limit of 6 per cent at the time of economic growth slowdown. Inflation based on the consumer price index (CPI) rose to 7.35 per cent in December, against 5.54 per cent in the previous month and 2.18 per cent in December 2018, data released by the Ministry of Statistics & Programme Implementation (MoSPI) showed on Monday. December inflation was the highest since July 2014, when it stood at 7.39 per cent. The CPI last breached RBI’s upper band of inflation target in July 2016.
Food inflation shot up to 14.12 per cent in December from 10.01 per cent in November on account of rising prices of vegetables and pulses. In December 2018, food inflation was a negative 2.65 per cent. Cities witnessed higher inflation of 16.12 per cent, while rural areas saw 12.97 per cent inflation in food.
Economists say now it is up to the Budget to address the issues in agriculture to bring down high food inflation which keeps recurring.
“Though we expect headline CPI inflation to correct sharply in January and further in February, from the unpalatably high 7.35 per cent recorded in December 2019, it is expected to remain sticky above 4.3 per cent in the next few quarters,” said Aditi Nayar, principal economist, ICRA.
The rate of price rise in vegetables surged to 60.5 per cent as against 36 per cent, mainly on account of triple-digit inflation in onion and garlic. Onion inflation doubled to 328 per cent in December from 128 per cent in the previous month.
Inflation in garlic inched up to 153 per cent from 144 per cent in November. Vegetable inflation in urban areas touched 75 per cent, while it was 53 per cent in the country-side. Price rise in pulses stood at 15.4 per cent.
Core inflation picked up marginally to 3.7 per cent in December, up 0.2 per cent from November. Tariff hike in December also pushed up inflation in telecom to 10.01 per cent against 2.83 per cent in the previous month.
CRISIL chief economist D K Joshi said a closer look shows that the current spike in inflation comes from transitory or idiosyncratic factors which typically don’t last long. “RBI targets headline inflation so it needs to contain that even if the rise is on account of transitory factors,” he said.
If food inflation returns to its trend level of over 5 per cent, maintaining the 4 per cent headline target will be challenging once the economy and core inflation rebound, Joshi said. Inflation in health fell to 3.80 per cent in December from 5.49 per cent in the previous month and in education to 3.73 per cent from 5.21 per cent.
Inflation in fuel was a mere 0.7 per cent. Inflationary risks on global crude oil increased on account of tensions in West Asia. The RBI monetary policy committee (MPC) had kept interest rates unchanged in December citing "much higher than expected" inflation. It followed five cuts of 135 basis points earlier in the year. The MPC will decide on the policy rate on February 6, days after Budget 2020-21.
“The job of RBI has become more complicated due to growth slowdown, very little window to play around with the policy rate on the down side and retail inflation now higher than the targeted level. Under such circumstances, all eyes are now on the forthcoming Budget,” said Devendra Pant, chief economist, India Ratings.