Fri Jan 12 06:00:00 CST 2018

Actual Previous
Change Y/Y 5.21% 4.88%

India's consumer price index increased by 5.21 percent on the year in December, up from 4.88 percent in November and further above the mid-point of the Reserve Bank of India's target range of 2.0 percent to 6.0 percent. This is the third consecutive increase in inflation and takes it to its strongest level since mid-2016.

As in the previous few months, vegetable prices were again the major factor driving the increase in headline inflation. Food and beverage prices (around 54 percent of the index) increased by 4.85 percent on the year in December, up from 4.41 percent in November, with the year-on-year increase in vegetable prices accelerating from 22.48 percent to 29.13 percent. Housing prices also increased at a faster pace, up 8.25 percent on the year in December from 7.36 percent in November. Fuel and light prices, however, rose by 7.90 percent on the year, little changed from 7.92 percent in November, while the year-on-year increase in clothing and footwear prices slowed from 4.96 percent to 4.80 percent.

Inflation in urban areas increased from 4.90 percent in November to 5.09 percent in December, while inflation in rural areas accelerated from 4.79 percent to 5.27 percent.

The further increase in headline inflation in December is consistent with officials' view that price pressures are likely to build in the near-term, though today's data suggest that vegetable prices continue to be the main factor driving this trend. At its most recent policy review, held early December, the RBI kept policy rates on hold but revised slightly higher its forecasts for headline inflation in the current fiscal year. Officials argued that the outlook will depend on several factors, including global oil prices, the strength of agricultural output, and the extent to which recent adjustments in sales tax rates for some products passes through to retail prices. The RBI's next policy meeting is scheduled for early next month.

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.