India's consumer price index rose 5.69 percent on the year in December, picking up from an increase of 5.55 percent in November and in line with the consensus forecast. This is the second consecutive increase in headline inflation, taking it further away from the mid-point of the Reserve Bank of India's target range of 2.0 percent to 6.0 percent.

At the RBI's most recent policy meeting, held last month, officials left policy rates on hold at 6.50 percent. They judged then that headline inflation could be volatile in the near-term, due to base effects and the impact of adverse weather conditions on food prices, but they expressed confidence that it would trend lower in coming quarters. They stressed that"monetary policy must continue to be actively disinflationary", suggesting that upside risks to the inflation outlook would likely remain their primary focus in upcoming meetings.

Consumer prices are expected to edge higher to 5.7 percent on the year in December versus November's 5.55 percent and following October's 4.87 percent.

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.