Retail inflation rises to become a macroeconomic disturbance

When the global economy is going through a period of turbulence, India’s domestic economy has got a shock of the conventional type- return of inflation to the unsustainable level.  

Latest inflation data from CSO for the month of December 2015 indicate that inflation has edged up to 5.61% from 5.41% in November.

Another negative trend is the contraction of industrial output during November 2015 by 3.2%. The IIP trend gives a caution to the government while realizing the 7.5% GDP growth target. The index has registered 9.8 % growth in the previous month.

This is the first time in 13 months that the IIP is registering a contraction. Main reason for the decline in industrial sector was the poor performance of the manufacturing sector which has the highest weightage in IIP.

Retail inflation out of the RBI’s comfort zone

The latest inflation data becomes critical as inflation is rising for the last six months. Retail inflation reached has surged mainly due to rise in food prices. For the RBI, the inflation target is 4% though the central bank says a band of 4 to 5 per cent as the tolerable level.

Food items constitute to nearly half of the CPI and decline in food prices was the major factor that caused inflation down to 3.78% in July last year. After that the retail inflation was increasing steadily.

Sustained increase in inflation is a matter of concern as it may tempt the RBI to make a policy rate hike. Last year, comfortable inflation level prompted the RBI to reduce the repo rate to 6.75%.

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