CPI Inflation Falls To 12-Month Low At 5.72% In December

Retail inflation fell to the lowest since December 2021, remaining within the central bank's target for the second straight month.

The Consumer Price Index inflation was at 5.72% in December, compared to 5.88% in November, according to data released by the Ministry of Statistics and Programme Implementation, on Thursday.

A Bloomberg poll of 30 economists had estimated a reading of 5.9%.

Core inflation rose to 6.3% in December as compared to 6.26% in November, according to Bloomberg.

Inflation in food and beverages was at 4.58% in December, against 5.07% in November. Vegetable prices fell by 15.08% compared to a fall of 8.08% over the previous month.

The CPI inflation provided a positive surprise, led by a welcome fall in food inflation, whereas most other sub-indices printed along anticipated lines, said Aditi Nayar, chief economist at ICRA.

While it is the fourth consecutive quarter of more than 6% inflation, it has declined from 7.28% in Q1 FY23, to 7.04% in Q2 FY23, to 6.12% in Q3 FY23, said Sunil Kumar Sinha, principal economist at India Ratings.

Although food inflation has declined, the worrying trend is a continuous increase of cereals and products inflation, which is trending upwards from May 2022, and remained in double digits in the last three months, he said.

CPI inflation for January 2023 may print at about 5.8-6%, slightly higher than the levels seen in December 2022, given the stickiness in core inflation and an unsupportive base for food inflation, Nayar cautioned.

The inflation trajectory is expected to depend on a combination of cereals prices, commodity prices and core inflation, Sinha said.

Although impact of monetary policy will gradually start reflecting in cooling down of retail inflation in the coming months—and the same is expected to drop to about 5% by Q1 FY24—there is a possibility of 25 basis points rate hike at the monetary policy committee meeting in February 2023, he said.

The terminal rate in present cycle is likely to be in the range of 6.50%-6.75%, according to India Ratings.

Taking into account today's lower-than-expected CPI inflation print, and the muted average IIP growth of 1.3% during October-November 2022, the MPC may choose to pause in February 2023, Nayar said.

Inflation Internals

• Cereal prices rose 13.79% in December, compared to 12.96% annually in November.

• Inflation in meat and fish was at 5.13%, as against 3.87% last month.

• Inflation in milk was at 8.51%, compared with 8.16% in the previous month.

• Inflation in oils and fats was at 0.53%, compared to -0.63% in November.

• Pulses inflation was at 3.89%, compared with 3.15% in the preceding month.

• Clothing and footwear inflation was at 9.58%, compared with 9.83% a month ago.

• Fuel and light inflation stood at 10.67% in December, against 10.62% in November.