January 12, 2017 06:00 CST

Actual Previous
Change Y/Y 3.41% 3.63%

Headline CPI inflation in India fell to 3.41 percent in December from 3.63 percent in November. Headline inflation has fallen for five consecutive months and is below the Reserve Bank of India's near-term target of 5.0 percent by March 2017 and is also below the mid-point of the RBI's medium-term target range of 2.0 percent to 6.0 percent. This could provide scope for further cuts in policy rates, perhaps as soon as the next meeting scheduled in early February.

In month-on-month terms, the consumer price index fell 0.61 percent in December after falling by 0.15 percent in November.

The fall in headline inflation in December again reflected weaker food price inflation, which dropped from 2.03 percent in November to 1.37 percent. Food price inflation had accelerated to a two-year high of 8.35 percent in July 2016 but has now fallen for five consecutive months. This can partly be attributed to solid rainfall during the annual monsoon season, but the government's decision in November to withdraw high-denomination currency notes as legal tender has also likely contributed. Reports suggest that cash shortages caused by this decision have prompted distress sales by suppliers to clear stocks of perishable goods. Consistent with these reports, vegetable prices fell 14.59 percent year-on-year in December after declining 10.29 percent in November, while prices for pulses fell 1.57 percent after increasing by 0.23 percent the previous month.

Changes in inflation rates in other categories of consumer spending, however, were generally small. Inflation fell from 4.98 percent in November to 4.88 percent in December for clothing and footwear, while inflation in housing costs fell from 5.04 percent to 4.98 percent. Fuel and light inflation rose from 2.80 percent to 3.77 percent.

Inflation in urban areas fell from 3.05 percent in November to 2.90 percent in December, while inflation in rural areas fell from 4.13 percent to 3.83 percent.

Although the drop in headline inflation in December, as in previous months, has mainly been driven by food prices, particularly perishable food prices, the fact that headline inflation is below the mid-point of the RBI's target range will make it easier for officials to justify a cut in policy rates. The RBI left rates unchanged at its last meeting in December, with officials suggesting that the impact of cash shortages on the economy may be short-lived. PMI data for December, however, indicated that business conditions remained weak after the initial impact of the government's decision, suggesting that some policy easing may be required to boost confidence.

The Consumer Price Index (CPI) is a measure of the average price level of a fixed basket of goods and services purchased by consumers. Within the overall CPI basket, food (47 percent) has easily the largest weight of any of the major components and a separate consumer foods price index is also released. Monthly and annual changes in the CPI provide widely used measures of inflation and the latter is the policy target of the Reserve Bank of India (RBI).

CPI numbers are widely used as a macroeconomic indicator of inflation, as a tool by governments and central banks for inflation targeting and for monitoring price stability, and as deflators in the national accounts. CPI is also used for indexing dearness allowance to employees for increase in prices. CPI is therefore considered as one of the most important economic indicators.

CPI numbers presently compiled and released at national level for India reflect the fluctuations in retail prices pertaining to specific segments of population in the country -- industrial workers, agricultural labourers and rural labourers. These indexes do not encompass all the segments of the population in the country and as such do not reflect true picture of the price behavior in the country. To overcome the above, the Central Statistics Office (CSO) of the Ministry of Statistics and Programme Implementation has started compiling new series of CPI for the entire urban population or CPI (Urban) and CPI for the entire rural population or CPI (Rural), which reflect the changes in the price levels of various goods and services consumed by the urban and rural population.