India Dec’20 CPI Analysis – Retail Inflation within RBI Target Band

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Consumer Price Index inflation eased to 4.59 per cent in December 2020 as compared to 6.93 per cent in November and 7.35 per cent in December 2019. Retail inflation fell sharply in December, led by a crash in vegetable prices. The rise in prices in October had been the sharpest since May 2014 when the inflation peaked to 7.61 per cent.

Takeaways from CPI

  1. Food inflation declined to 3.41 per cent in December in 2020, compared to 9.5 per cent in the previous month. Apart from vegetables, other prices were however positive.
  2. Inflation in cereals and products fell to 0.98 per cent from 2.32 per cent in November 2020. Inflation in the pulses category was at 15.98 per cent compared to 17.91 per cent last month.
  3. Clothing and footwear inflation was at 3.49 per cent compared to 3.3 per cent in the previous month.
  4. Housing inflation stood at 3.21 per cent against a rise of 3.19 per cent last month.
  5. Fuel and light inflation stood at 2.99 per cent compared to 1.9 per cent earlier.
  6. Inflation in household goods and services remained steady at 2.95 per cent compared to 2.96 per cent in the previous month.
  7. Consumer durables and consumer non-durables stood at 115.9 and 149.1 respectively. Consumer durables output fell by 0.7 per cent, compared to 1.4 per cent contraction in November 2019.
  8. Health inflation was at 5.98 per cent compared to 5.54 per cent last month.
  9. Inflation in personal care and effects was at 11.68 per cent in December compared to 11.97 per cent in November 2020 reflecting the fall in gold and silver prices.
  10. Core inflation too eased by 30bps to 5.7 per cent in December from 6 per cent in November. This was driven by moderation in transport and communication inflation to 9.3 per cent from 11.1 per cent in November despite rising domestic and international oil prices.
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The RBI, which mainly factors in retail inflation while arriving at key policy rates, has been mandated by the government to keep inflation at 4 per cent (+/- 2 per cent). The recent rise in commodity prices with pick up in the global economy and depreciating dollar exerts cost-push pressures, keeping inflation near 5-6 per cent levels in the near term. Food inflation is likely to trend lower in FY21 as supply conditions turn favorable.

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