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CPI inflation starts another journey after turn in base effect

India’s Consumer Price Index ( CPI inflation ) rose from 4.91 per cent in November to 5.59 per cent in December.

Concerning the change,

RBI’s monetary policy is not likely to be disturbed. This is because the average for the last quarter of 2021 undershot the bank’s forecast by 10 points. This base effect, which was necessary for lowering CPI inflation from 6+ per cent to close to RBI’s target of 4 per cent in the space of a few months, took a turn for the worse in December and is unlikely to help policymakers in the first quarter of 2022.

Nomura in a report on January 13 said “The base effect turns distinctly unfavourable in Quarter 1 of 2022, with headline inflation in 1st Quarter of 2021 dipping to 4.9 per cent from 6.4 per cent in 4th Quarter of 2022.”

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In November, CPI inflation

had risen less than expected from 4.48 per cent in the previous month to 4.91 per cent. The RBI noted in its monthly State of the Economy article that inflation had risen only 43 basis points due to a favourable base effect of about 30 basis points, partially offsetting price momentum of around 70 basis points.

This favourable base effect of CPI inflation 30 basis points in November turned into an unfavourable base effect in December.

Elaborating on the CPI inflation data for December, Elara Capital said, “The higher year-on-year (inflation) print was mainly due to an unfavourable base even as sequentially, the index recorded a decline.” The general index fell to 166.1 in December as opposed to 166.7 in the previous month.

If the overall price momentum is zero, along with no change in the general index of CPI over January- March 2022, inflation would average 6.1 per cent in the quarter, which will be 40 basis points higher than the RBI’s forecast of 5.7 per cent.

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