Vegetable prices see 60.5% jump; retail inflation breaches MPC target band

Retail inflation rose to 7.35% in December – the highest since July 2014

India's retail inflation accelerated to 7.35% in December on the back of rising food prices.

The simultaneous hardening of global prices poses a challenge to the government and the Reserve Bank of India in containing domestic food inflation at a time when the economy is already going through a deep slowdown.

The rise in food inflation over the last three months or so has been viewed as transitory, driven largely by the damage to the kharif crop from prolonged unseasonal rains during September to early November.

As per the data released by National Statistical Office (NSO) on Monday, the spike in inflation in the vegetable segment was 60.5 per cent during the month compared to December 2018.

This is the highest retail inflation witnessed during the Narendra Modi government since 2014.

The CPI inflation, also known as retail inflation, hit a 40-month high of 5.54 per cent in November, from 4.62 per cent in October.

Government data however shows that "core inflation" - a metric that excludes generally volatile components like food and energy - came in only at 3.7%, a slight increase from past year. "Stickiness in prices of protein items may provide a floor to food inflation going forward, even once vegetable prices correct to seasonally appropriate levels", said Ms Aditi Nayar, principal economist, ICRA. A poll of 37 economists had estimated consumer price inflation to be at 6.7% in December 2019, Bloomberg reported. "No", analysts at rating agency Crisil said.

The data assumes significance as the Reserve Bank, in its latest monetary policy review, maintained key lending rates on account of rising retail inflation.

The central bank will make its next interest rate decision on February 6, a few days after finance minister Nirmala Sitharaman presents the Union Budget. In July 2014, the CPI was 7.39 per cent, a tad higher than December 2019's number of 7.35 per cent.

According to FAO, the 12.5 per cent annual increase in its Food Price Index in December has been led mainly by edible oils (30.9 per cent), meat (18 per cent) and dairy (17 per cent). We also believe the RBI could pause in its upcoming February meeting given the headline number in January will most likely continue to stay above target.



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