Retail inflation zooms to 7.35%, hits 6-yr high

Retail inflation zooms to 7.35%, hits 6-yr high

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The common man continued to reel under the burden of rising prices as the retail inflation rate rose sharply in December to 7.35% backed by a whopping 60.5% rise in vegetable prices.

This will prompt the government to enhance supply side measures and the RBI to pause the interest rate cut for longer than expected.

This is the highest retail inflation print since 2014. Retail inflation was at 5.54% in November and 2.19% in December 2018. The fine print of the data released by the government showed onion and garlic sent inflation skyrocketing. While onion prices rose 328% in December compared to 146% in the previous month, inflation in garlic rose to 153%.

Onion and garlic are two important ingredients in the Indian kitchen.

At 7.35%, the consumer price index breached the upper band of the Reserve Bank of India’s inflation target of 6%. This may prompt the RBI to maintain status quo in its February 6 monetary policy.

Retail food inflation rose 14.1% in December from 10.01% in the previous month.

Rising food inflation is unpleasant news for a poor country like India, where food’s share in the retail inflation basket is over 50%. Rest of the items weigh less than 50% in the CPI basket.

Rise in vegetable prices in the winter months may pose bigger problems to policy makers as it is during this season that vegetable rates are usually under control.

It is during summer that vegetable prices spike in India because much of them perish due to weak transportation.

December core inflation, however, came as a little respite as it came down by 20 basis points to 3.7% from 3.9% in November.

Core inflation, which excludes the volatile food and fuel prices, is considered to be a better measure of inflation.

“CPI at 7.35% is led predominantly by food, fuel and miscellaneous. Given this number, CPI is expected to firm up further in the next few months. For headline inflation to converge to 4% over the next fiscal year, food inflation will need to reverse dramatically. We maintain our no rate cut until October-December quarter 2020,” said Shubhada Rao, chief economist at Yes Bank.

Most of the analysts including from ICRA an Emkay Capital, maintained that RBI will wait and watch for inflation to come down before moving on to cut rates further.

RBI Governor Shaktikanta Das’ had, a couple of days ago, said that price stability is the central bank’s main concern.

Meanwhile, a six-year high inflation print coming just two weeks before the Budget may also force Finance Minister Nirmala Sitharaman to have a re-think on stimulus measures that people may be waiting for.

Though vegetable and food price rise is considered to be transient, the problem occurs when a pronged spike in prices of these items gets transmitted into other areas.

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