Inflation matrix: On the numbers and trends 

In the final inflation print before the Union Budget for 2025-26 is presented, followed by the first review of the monetary policy led by the new Governor of the Reserve Bank of India (RBI) in early February, the price rise faced by Indian consumers eased to 5.22% in December. Although a four-month low, this still marked only a mild decline from November’s 5.5% uptick in the Consumer Price Index (CPI), and was largely driven by a sequential easing in food prices. Food inflation moderated from over 9% in the previous month to 8.4% last month, and though inflation in vegetables cooled from 29.3% to 26.6%, it still remained generally high. Households still forked out a lot more for their meals than they did a year ago — it must be recalled that overall inflation was 5.7% and food price rise, over 9.5% in December 2023. While prices of some food items, including vegetables, are seen cooling further this month, those of a few critical ingredients have started spiking, including of edible oils, that rose at a 33-month high pace of 14.6% in December. Eggs, meat and fruits also saw inflation accelerating last month along with the relatively humble potato (up 68.2%). Moreover, inflation in wholesale prices has gained pace, signalling that there is room for higher costs to be passed on to consumers for food items as well as manufactured products.

The government and industry want the RBI to cut interest rates to reinvigorate consumption and fading growth impulses by looking through ‘volatile’ food inflation. But even industry captains admit that just keeping food prices out of the interest rates and growth-inflation balancing act will not suffice. Moreover, even if the weightage for food in the CPI is reduced in line with the recent household consumption spending survey results, food price trends have a material impact on the spending propensity of households and their inflation expectations. Inflation may yet average 4.5% through January to March, as the RBI expects, but the central bank that has committed to await a durable alignment to its 4% goal before slashing rates, has a difficult call to make in February. Tangible measures, if any, to ease price pressures in the Budget, along with some visibility on the Centre’s fiscal glide path, could help tip the scales for a rate cut cycle to begin soon, if not next month. There are a few new imponderables that have compounded the trade-off matrix for policymakers in North Block as well as Mint Street — the swift unravelling of the rupee vis-à-vis the dollar in recent weeks which raises the risk of importing inflation, among other collateral effects, especially as global oil prices have resurged to multi-month highs. A very nuanced approach is imperative to avoid fresh missteps.