India: Inflation falls more than expected to lowest level in a year in December
Inflation came in at 5.7% in December, down from Novembers 5.9%. December’s reading represented the weakest inflation rate since December 2021 and was below market expectations. As was the case in November, the decline was driven by moderating price pressures for food and beverages. This decline will have been due to a stronger winter harvest and lower prices for agricultural products on global markets.
That said, core inflation rose slightly to 6.1% (November: 5.9%), suggesting inflation may remain persistent ahead.
Annual average inflation was unchanged at November’s 6.7% in December.
Lastly, consumer prices dropped 0.45% in December over the previous month, coming in below November’s 0.11% drop. December’s result marked the weakest reading since January 2021.
Looking ahead, our panelists expect inflation to continue easing this year on a tougher base effect, weakening economic activity and cooling commodity prices. One key factor to watch is this seasons wheat crop. Thanks to favorable weather and heat-resistant seeds, it is projected to reach record levels, which could bring inflation down faster than anticipated. Other risks include monetary policy, currency fluctuations, the Russia-Ukraine grain deal and changes in export controls for key agricultural commodities.
Analysts at ANZ commented on the persistence of core inflation:
“CPI inflation surprised on the downside yet again in December. Even so, the Reserve Bank of India’s (RBI) job is not done as core inflation remains persistent. The easing of inflation was largely driven by vegetable prices. We expect one final rate hike of 25bp at the February monetary policy meeting.”
In contrast, analysts at Nomura said:
“Though core inflation surprised higher, details such as slower momentum in super core inflation and the services basket may be early signs of the impact of slowing demand on inflation. We are surprised that core goods inflation remains high, despite the steep drop in commodity prices (input costs), but we doubt this can be sustained amid weakening exports/goods demand.”