India’s CPI Inflation Spiked to 7.4% in December 2019

India's retail inflation accelerated to 7.4 percent YoY in December as compared to 5.5 percent in November 2019, owing to volatile vegetable and onion prices. The inflation was previously slumbering along at 2 percent from November 2018 to April 2019 and around 3 percent from May 2019 to August 2019. Since October 2019, it has started breaching the Reserve Bank of India's (RBI) medium-term target of 4 percent.

The food items that constitute around half of the inflation basket (48.2%) grew 14 percent in December compared to 10 percent in November. Within the food and beverages category, vegetable prices rose 60 percent in December compared to 36 percent in November 2019.

Core inflation - excluding volatile prices of items such as food and energy - grew modestly at 3.7 percent in December, led by increases in freight and telecom rates. The stagnant core inflation that has more weightage (around 52 percent) as compared to food and beverages weightage (around 48 percent) reflects subdued demand in the economy. 

December inflation represents a breach of the RBI’s upper bound on inflation (2-6% target) for the first time since July 2016. Citing inflation concerns, the RBI kept interest rates unchanged in its December 2019 meeting. The central bank is likely to face a policy dilemma in the next monetary policy committee meeting in February as the Indian economy is facing stagflation and high inflation coupled with low GDP growth.