Onion effect! Retail inflation touches 5.54% in November; highest in more than 3 years

The consumer price index (CPI) continued to breach the Reserve Bank of India's (RBI's) medium-term target of 4 per cent for the second straight month in November due to spike in food prices. The CPI inflation, also known as retail inflation, hit a 40-month high of 5.54 per cent in November, from 4.62 per cent in October. It stood at 6.07 per cent in July 2016.

Inflation in the food basket jumped to 10.01 per cent in November, from 7.89 per cent in October. On the back of a surge in onion prices, vegetables inflation shot up to 36 per cent versus 26 per cent in October. Within vegetable items, onion prices have spiked by over 400 per cent since March this year, according to an official data.

"The inflation rate at 5.54 per cent is heading towards the upper limit set by the RBI at 6 per cent. However, this surge in inflation was expected with the skyrocketing prices in vegetables, as food and beverages has a share of around 45 per cent in Consumer Price Index (CPI)," said Deepthi Mary Mathew, Economist at Geojit Financial Services.

Inflation rate in cereals and products was at 3.71 per cent during the month under review.  Pulses and products reported an inflation of 13.94 per cent in November compared to 11.72 per cent in October.

Core inflation, which excludes volatile components like food and fuel, remained unchanged at 3.5 per cent.

In November, retail inflation breached the RBI's medium-term target of 4 per cent for the second consecutive month since July 2018, due to consistent rise in food prices. In its December policy review, the RBI kept policy rates unchanged for the first time this year, on higher inflation expectations. The central bank expects food inflation to remain high in the next six months. It has also revised the inflation projection from 3.5-3.7 per cent in the second half of 2019-20 to 4.7-5.1 per cent.

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"The worrying fact is the low core inflation rate that is not showing any signs of improvement at 3.5 percent. It reflects the tepid demand in the economy," Mathew said.