The Consumer Price Index (CPI)-based inflation surged to 4.88% in November, the fastest month-on-month increase in 16 months, driven by soaring vegetable prices and a rise in fuel inflation.

Vegetable prices jumped 22.48% year-on-year, the steepest since the double-digit inflation episode in early 2013. Considering prices of vegetables had fallen 10% in November last year, there is a statistical base effect here.

Food inflation doubled to 4.41% in November from 2.26% in October and the pickup in price rise was reflected in almost all categories except pulses, prices of which continued to fall. Vegetables may well be the main culprit but the quickening of inflation is not restricted to the food segment alone.

The recent surge in global crude oil prices was reflected in the rise in fuel inflation. Fuel prices increased for the sixth month in a row, rising 7.92% in November. Considering that the rise in oil prices is continuing unabated, this is not a good sign. Quickening of fuel inflation means that overall retail inflation and even food prices would continue to edge up in the coming months as fuel permeates every activity of the economy.

The effect of the wage hikes for government employees was evident from the rise in housing inflation to 7.36% from 4.98% a year ago.

The most disturbing sign is however the rise in core inflation, which the Reserve Bank of India (RBI) tracks closely. Core inflation, which excludes food and fuel, rose to 4.83% and this puts it firmly above the central bank’s medium-term target of 4%. Core inflation has been historically stickier than other components, especially downwards.

If one looks at RBI’s fan chart in the December policy, the central bank had given ample warnings on where inflation is headed. In fact, RBI had raised its inflation forecast for the second half of the fiscal year for the second time to 4.3-4.7%.

The markets had expected a sharp rise in retail inflation in November and consensus estimates had put CPI inflation around 4.45%. But the magnitude of the rise has stumped many.

The central bank’s survey of professional forecasters had put retail inflation at 4.4% and core inflation at 4.5% by March. The November inflation has upset these statistics and the prospect of a rate hike is looking more imminent now.

The debt market environment has already changed, with the yield on 10-year government securities hitting an intra-day high of 7.23% on Tuesday. With this inflation print, bond yields are likely to head even higher.

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