Unfavourable base propels CPI inflation to 5.59% in December 2021

India’s headline retail inflation jumped to 5.59 percent in December 2021, thanks to an unfavourable base effect.

The latest Consumer Price Index (CPI) inflation print is 68 basis points higher than the November 2021 level of 4.91 percent, data released on January 12 by the National Statistical Office showed. It is the highest inflation has been since July 2021, when it had also come in at 5.59 percent.

Despite the sharp increase in inflation in December 2021, the average for the last quarter of 2021, at 5.0 percent, is marginally lower than expected. The Reserve Bank of India had forecast CPI inflation would average 5.1 percent in October-December 2021.

In December 2021, inflation rose even as the general index of the CPI fell to 166.1 from 166.7 in November 2021, indicating the presence of an unfavourable base effect.

Meanwhile, the Consumer Food Price Index contracted 1.2 percent month-on-month in December 2021, driven by a 5.4 percent sequential decline in the vegetable index of the CPI. However, an unfavourable base meant food inflation climbed to 4.05 percent from 1.87 percent in November 2021.

Non-food, non-fuel inflation, or core inflation, also remained high at 6.1 percent, unchanged from November 2021.

While the latest headline retail inflation print of 5.59 percent is slightly lower than expectations of 5.8 percent as per a Reuters poll, it is the 27th consecutive month in which it has come above the Reserve Bank of India’s medium-term target of 4.0 percent. However, this is unlikely to perturb the Monetary Policy Committee (MPC) when it next meets on February 7-9.

“While CPI inflation has hardened sharply between November and December 2021, the uncertainty triggered by the third wave is sure to take precedence when the MPC meets next month,” said ICRA Chief Economist Aditi Nayar.

“We now see a negligible likelihood of a change in stance or reverse repo hike in the February 2022 policy review. The duration of the current wave and the severity of restrictions will determine whether policy normalisation can commence in April 2022, or be delayed further to June 2022,” Nayar added.

CPI inflation is likely to rise even higher in the coming months, with the central bank having forecast it would average 5.7 percent in January-March 2022.