India's retail inflation inches up to three-month high of 1.3% in December

India’s retail inflation rose for the second successive month in December, data released by the statistics ministry on Monday showed, driven by a moderation in negative food inflation and an uptick in core inflation.

At 1.3%, the consumer price index (CPI)-based inflation value hit a three-month high in December. The comparable value in November was 0.7%. Last December, CPI inflation stood at 5.2%, which declined steadily thereafter and built up an unfavourable base.

The December print was below the consensus estimate of 1.6% in a Mint poll of economists, who had flagged a bottoming out of food prices and early signs of firming up inflationary pressures.

While the CPI value is below the lower tolerance band of the Reserve Bank of India’s (RBI) 2-6% target range in five of the past six months, the central bank’s next monetary policy move may depend on signals from the Union budget on 1 February, and base-year revisions for inflation on 12 February and GDP on 27 February.

With the latest print, the average inflation for the October-December quarter comes in at 0.8%, marginally higher than the 0.6% projected by the RBI in its December policy.

What drove inflation higher

The primary driver for the increase in December inflation was slowing negative food inflation, which remained in negative territory for the seventh successive month.

Food inflation rose to -2.71% in December from -3.91% in November, mainly due to higher inflation in meat and fish, which increased sharply to 5.1% in December from 2.5% in November. Inflation in eggs also rose to 4.8% from 3.9% over the same period. Lower negative inflation in vegetables (-18.5% in December vs -22.2% in November) also contributed.

Core inflation, which excludes volatile items such as food and fuel, inched up to 4.5% in December from 4.2% in November, settling at an over two-year high. This was mainly led by rise in gold and silver prices, with gold inflation climbing to 68.7% from 58.6%, and silver 97.1% from 65.7% over the past two months.

“While food prices remained in the negative zone, inflation in the miscellaneous segment increased, primarily reflecting a jump in gold prices,” said Avni Goyal, senior economist at HDFC Bank. The miscellaneous segment includes inflation in household goods and services, health, education and other personal care items.

However, barring metal prices, core inflation remained low, reflecting the continued benefit of cuts in goods and services tax (GST). According to Crisil, GST rate cuts and benign global commodity prices have primarily benefited goods inflation, which was 2.2% during the month.

Policy pause expected

With inflation showing early signs of firming up, attention is now turning to the RBI’s policy response. Economists expect a pause in RBI’s rate cut spree since February 2025, which saw it cut the repo rate by a cumulative 125 basis points as inflation remained low. The central bank's monetary policy committee (MPC) is scheduled to meet next on 4-6 February, following the Union budget on 1 February.

“From a policy perspective, the RBI is likely to maintain a status quo on rates in February,” said Goyal of HDFC Bank.

“While the December 2025 MPC minutes suggest a possibility of another rate cut in February 2026, Icra believes that a pause is warranted at the current juncture,” said Aditi Nayar, chief economist at Icra.

Nayar added that it would be prudent to wait and assess the updated CPI and GDP series, which are due to be released later in February, “as these will determine the current growth-inflation mix and aid in forming a fresh outlook”.

Economists also expect retail inflation to rise from here on as the base turns unfavourable — CPI inflation recorded a steady decline from 5.2% in December 2024 to 3.3% in March 2025 to a low of 0.25% in October, before beginning to rise.

As such, the RBI expects inflation to average 2.9% in January-March and 3.9% in April-June next year, according to projections in its December policy.

However, a lot will depend on the changes being made in the CPI series, which will see more items, better coverage and improved methodology to capture prices in the country.

Gireesh Chandra Prasad contributed to this story.