Retail inflation flares up again, upsets Reserve Bank

NEW DELHI:  In what could put more pressure on the Reserve Bank of India to keep up with its rate hike cycle, retail inflation shot up to 6.52% in January, breaching RBI’s upper tolerance limit of 6% after a two-month lull. 

Retail inflation, based on the consumer price index, was 5.72% in December and 6.01% in January 2022. The previous high was 6.77% in October 2022. The latest number came as a shock because most estimates had projected the number to be below 6%.

The high inflation print in January was on account of higher food prices and core inflation (price change in non-fuel, non-food items), government data released on Monday showed. Food inflation, which has a 40% weightage in the index, came in at 5.94% in January compared with 4.19% in December, driven by cereals and protein-rich items such as milk and eggs. Cereals and milk have weightages of 12.35% and 7.72%, respectively, in the inflation basket. Cereals and cereal product inflation reached 16.1% in January 2023 while milk prices were up 8.8% in the same month.

Experts believe inflation is likely to stay above RBI’s upper tolerance level at least for the next two months. “Much of this sharp increase is due to high cereal price inflation and partly due to an unfavourable base. However, with cereal prices staying on the upside, inflation could remain around 5.5-6% in the near term,” said Suvodeep Rakshit, senior economist at Kotak Institutional Equities. He added that there is now a distinct possibility of RBI effecting a 25 bps repo rate hike in the next monetary policy review.

Aditi Nayar, chief economist at ICRA, believes retail inflation in February may drop to 6.2% owing to a dip in food prices, but it will remain above RBI’s 6% tolerance level owing to the stickiness in core inflation.