Retail inflation dips to 14-month low

Andrew Cummings
January 13, 2021

"The significant drop in vegetables and food prices has led to a sharp fall in the inflation data".

USA consumer prices increased in December, with households paying more for gasoline, though underlying inflation remained tame as the economy battled a raging COVID-19 pandemic, which has weighed on the labor market and the services industry.

The IIP had grown by 2.1% in November 2019.

RBI has slashed its main repo rate by 115 basis points since March 2020 to cushion the shock from the coronavirus crisis, but left rates unchanged last month.

Cereal and other products saw marginal rise in price during December past year at 0.98 per cent. Inflation in meat and fish, and egg segments stood at 15.21 per cent and 16.08 per cent, respectively. IIP growth for October has now been revised to 4.2 per cent. An accompanying moderation in the inflation rates for meat and fish, eggs and pulses, helped the consumer food price index record its slowest pace of increase in 16 months at 3.4%. Oils and fats have rarely displayed such a high inflation. Mining output contracted 7.3% in the month, while manufacturing declined 1.7%, indicating an unwinding of inventory build-ups with the quenching of pent-up and festive demand.

"CPI inflation has been above RBI's upper bound inflation target of 4 +/-2 per cent for more than 11 months".

While supply-side constraints were the primary reason till now, growing demand as economic recovery firms up may not tame core inflation soon. "On a quarterly basis 3QFY21 core inflation peaked to a eight quarter high of 5.75 per cent". Even during the high inflation years of 2012 and 2013, inflation in this segment had not crossed 20 per cent.

Retail inflation for December, data for which was also released, offered some relief to policymakers, with price levels easing to a 15-month low of 4.59 per cent on account of a dip in food inflation. Setting an inflation target below the trend may impart a deflationary bias to monetary policy because it will go into overkill relative to what the economy can intrinsically bear in order to achieve the target, said the paper titled "Measuring trend inflation in India".

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