CPI nears 5% mark as food inflation surges; core inflation also rises

Consumer price index (CPI)-based inflation surged to a fifteen-month high of 4.9% in November from 3.6% in October. CPI inflation is now nearly 340 basis points (bps) higher than the lowest point of 1.5% in June - reason why the Reserve Bank of India remains cautious.

Inflationary pressures are again in the spotlight with the crude oil price seeing a sustained rise, impact of payment of higher house rent allowances to government employees, rising rural wages, some indication of return of pent up demand in the economy and a weak base.

In November, the pick-up in inflation was broad-based, driven mainly by a 250 bps on-month rise in food inflation, a 110 bps rise in fuel inflation on the back of higher global oil prices, and a 40 bps pick-up in core inflation reflecting the impact of payment of higher house rent allowances.

Food inflation continued to creep higher to 4.4% from 1.9% led by vegetable prices, mainly onion and tomato. Retail prices of onion and tomatoes – which have large weights in the food index – nearly doubled since September with consumers paying nearly Rs 40 per kg for each in November as per the data released by Department of Consumer Affairs. Inflation in cereals and pulses continued to ease backed by near-normal southwest monsoon and bumper crop from last year.

Meanwhile, core inflation jumped 40 bps up on-month to 4.9% November, led mainly by higher housing inflation, but also a pick-up in other core inflation items indicating an impact of both – the return of some pent up demand and higher tax rates on services under the goods and services tax (GST).