Retail inflation eases to 4.6% in December on softer vegetable prices

Crisis year 2020 ended with a consolation to the common man’s pocket, as the consumer price index-based (CPI) inflation rate eased to 4.59 per cent in December, down from 6.93 per cent in November, and a six-year peak of 7.61 per cent in October. The decline was led by precipitous fall in food inflation from 9.5 per cent in November to 3.4 per cent in December, the lowest since August 2019.

This decline in food inflation was brought about by a favourable base effect in vegetables, despite one of the highest ever inflation levels seen in edible oil segment.

In December 2019, vegetable inflation recorded its peak (under the current CPI series) at a staggering 60 per cent. Such a high base a year ago resulted in deflation of 10 per cent in the vegetables segment.

Rising further from 17.9 per cent in November, CPI inflation in oils and fats crossed 20 per cent in December 2020. The segment rarely displayed such a high inflation before. Even during the high inflation years of 2012 and 2013, this segment had not crossed 20 per cent (it came close to 18 per cent a few times).

Overall, consumer inflation inched below 5 per cent for the first time since November 2019. It was above the upper tolerance band of 6 per cent set by the monetary policy committee (MPC) of Reserve Bank of India for 10 out of 12 months of 2020.

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The easing of inflation means that the the low interest rate phenomenon in the Indian economy may continue for a longer period than initially expected. The MPC of Reserve Bank of India has’nt cut policy repo rate since May 2020.

Although, a fall in inflation in the last month of 2020 was expected, the actual extent surprised the experts.

But this drop may be a fleeting one, and it may not radically affect MPC outlook, they said.

“While the considerable softening in the CPI inflation in December 2020 offers welcome relief, it is unlikely to prove adequate to allow for rates to be eased in the upcoming policy review, as the headline inflation may only record a limited further decline before resuming an uptrend,” said Aditi Nayar, principal economist at ICRA.

Interestingly, core inflation, which measures the growth in CPI after removing the food and fuel components, is not moderating, and remained in the range of 5.6-5.8 per cent in the second half of 2020.

While supply side constraints were the primary reason till now, growing demand as economic recovery firms up may not tame core inflation soon.

“With both global and domestic demand expected to strengthen with the rollout of Covid-19 vaccines, the core-CPI inflation may remain relatively sticky, and display a limited correction going forward,” Nayar said.

The record jump in oil and fat inflation is concerning since India heavily relies on edible oil imports, India Ratings said in a note.

Among other food products, inflation in milk eased to slightly below 4 per cent after remaining above that mark for a year. But that for other protein rich food items like pulses, meat, and eggs, retail inflation remained very high, at above 15 per cent.

Higher taxes on petroleum products (supply side) are still impinging upon core inflation. Fiscal stress may delay the reduction in fuel excise duties and state sales taxes, keeping core inflation elevated, said Sunil Kumar Sinha, principal economist at India Ratings.

Inflation in the transport and communication segment remained high at 9.32 per cent in December.

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