CPI Inflation Falls Sharply To Within RBI Target Band

CPI Inflation Falls Sharply To Within RBI Target Band

Retail inflation fell sharply in December, led by a crash in vegetable prices.

Consumer Price Index inflation stood at 4.59% in December 2020 compared to 6.93% in November 2020, according to data released by the Ministry of Statistics and Program Implementation on Tuesday.

At the current level, inflation is back within the Monetary Policy Committee’s target range of 4 (+/-2)% for the first time since March 2020. Inflation in December was at its lowest in 15 months. Inflation in food and beverages dropped to 16-month low of 3.87% in December, compared to a 8.76% in November. Vegetable inflation turned negative at 10.41% in December compared to an increase of 15.63% in November.

Core inflation also eased to 5.34% in December 2020 compared to 5.56% in November.

A Bloomberg poll of 27 economists had estimated inflation at 5% for December 2020.

Inflation Internals

Apart from the sharp fall in vegetable prices, inflation in other categories such as cereals and pulses also fell.

  • Inflation in cereals and products fell to 0.98% from 2.32% in November 2020.
  • Inflation in the pulses category was at 15.98% compared to 17.91% last month.
  • Clothing and footwear inflation was at 3.49% compared to 3.3% in the previous month.
  • Housing inflation stood at 3.21% against a rise of 3.19% last month.
  • Fuel and light inflation stood at 2.99% compared to 1.9% earlier.
  • Inflation in household goods and services remained steady at 2.95% compared to 2.96% in the previous month.
  • Health inflation was at 5.98% compared to 5.54% last month.
  • Inflation in personal care and effects was at 11.68% in December compared to 11.97% in November 2020.

The drop in inflation may persist in January and give way to a base effect led uptrend in the first half of next fiscal, said Aditi Nayar, principal economist at ICRA.

The early data for the month of January 2021 reveals contrasting underlying forces for food items, with a continued plunge in vegetable prices, juxtaposed with a broad-based rise in prices of other food items, especially edible oils. Additionally, the hardening prices of crude oil, and its partial transmission into domestic retail prices, remain a concern. Overall, we expect the CPI inflation to record a measured further dip in January 2021.
Aditi Nayar, Principal Economist, ICRA

Key Vegetable Prices Ease

Inflation across most key vegetables, including potatoes, tomatoes and onions fell sequentially. Cabbages, cauliflower, carrots, brinjal, spinach, pumpkin and lady’s fingers were of the other vegetables which saw a sharp fall in prices over a year ago. Tomato

  • Potato prices in December were 43.51% higher than a year ago compared to 107% in November.
  • Onion prices fell 46.47% over a year ago compared to an annual fall of 0.76% last month.
  • Inflation in tomatoes was at 15.95% in December compared to 9.6% in November 2020, though prices were down month-on-month.

A sharp reversal in food prices coupled with favourable base effects pulled inflation back within the RBI's target band in December, said Rahul Bajoria, chief India economist at Barclays.

However, the moderation will likely be temporary as higher oil prices and rising non-perishable food prices will effectively rule out rate cuts by the central bank for some time, he added.

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