Consumer price index (CPI)-based inflation rose to 5.2% in December, up from 4.9% in November. The low-base effect, which was behind the acceleration in CPI inflation from July to November 2017, faded away in December. Yet CPI inflation printed at a 17-month high driven by higher inflation in housing, food (especially vegetables) and personal care and effects – factors that still warrant caution on part of the Reserve Bank of India (RBI).

This is corroborated by the fact that the three-month moving average of seasonally adjusted CPI shows a continued increase in momentum, despite the base effect turning favourable (excluding the base effect, inflation would have stood at ~5.4% in December).

The steep rise in housing inflation (at 8.2% from 7.4% in November) clearly reflects the impact of higher house rent allowances paid to government employees – a concern that was persistently highlighted by the RBI. Meanwhile inflation in vegetables soared to 29.1%, while inflation in personal care and effects (at 4.5% from 3.4%) is reflective of both, return of pent up demand in the economy and impact of higher taxes on services due to goods and service tax implementation).

Core inflation climbed to 5.1% in December – also a 17-month high, from 4.9% in November led by inflation in housing and personal care. Meanwhile, fuel inflation dipped while food inflation rose led by vegetables.

For fiscal 2018, CRISIL maintains the average inflation forecast at 4%. Accordingly, we also expect the Monetary Policy Committee to keep policy rates on hold for the remainder of this fiscal.

So far, inflation has averaged 3.2% for the fiscal, which suggests that the last quarter is expected to see a steep rise in inflation. Overall food inflation is expected to stay benign, but mild pressures could arise due to some shortfall in rabi sowing so far (especially oilseeds and wheat). Of bigger concern is the firming up of housing inflation and the sharp and sustained rise in global oil prices. On the downside, items of mass consumption could see softer prices if the latest downward revision in the Goods and Services Tax rates on some items is passed on to consumers. The interplay among factors will therefore determine the pressures on inflation.