Why is Retail Inflation Trending Higher in December?

On January 12, the MoSPI (Ministry of Statistics and Programme Implementation) released India’s annual retail inflation data, measured by the CPI (Consumer Price Index). As per the data, CPI rose to 1.33% in December 2025.

The CPI increased from 0.71% recorded in November 2025, after rising from 0.25% earlier, before crossing 1% by the end of the year.

However, the figure was lower than the 1.5%, as projected by a Reuters poll. Thus, December is the fourth consecutive month where price growth has stayed below the RBI’s (Reserve Bank of India’s) lower tolerance band of 2% to 6%.

Core inflation excludes volatile items. It climbed to a 28-month high of 4.6%. The surge in gold and silver prices mainly pushed the prices higher. The headline inflation too moved up by 62 basis points, and food inflation increased by 120 basis points.

The MoSPI data is the final reading of the current series. It suggests that the bottom for price pressures may be behind us. But the overall environment is still fairly well anchored.

Traders now face an important question: with inflation still hovering at these levels, will the central bank move towards more aggressive monetary easing?

What is Causing Higher Inflation?

The volatility of precious metals and the cost of food have led to the recent CPI rise. MoSPI noted that the rise in prices of specific food categories (such as vegetables, meat and fish, and eggs) caused both the headline inflation and food indices to surge. Spices and pulses continued to show price resilience.

Prices of certain food categories witnessed a sequential rise. However, the broader food basket remained in deflation, which helped keep the overall CPI contained. Seasonal pressures on prices have started to build, but they are still not strong enough to push CPI out of the RBI’s comfort zone.

The 'personal care and effects' segment too has contributed to the CPI rise. Other essential components of the core basket, such as clothing, footwear, housing, and education, also showed a moderate trend.

But are investors prepared for a period where external factors like commodity prices would dictate the CPI more than domestic consumption?

How will the RBI’s Act?

The latest data has divided market analysts on what the RBI’s next steps could be.

Some economists argue that because the current reading has remained well below the lower bound of the mandated target, there is a clear window for the Monetary Policy Committee to act.

One argument in favour of a rate reduction is the continued softness in food inflation, along with inflation prints coming in lower than earlier estimates. As a result, a modest policy adjustment could help support growth.

Others, however, are calling for a more cautious RBI stance. Some experts believe the focus may shift from cutting interest rates to managing liquidity within the banking system instead.

There is also an expectation that the central bank may wait for greater clarity on global crude oil prices and the stability of the local currency before taking a final call on rates.

With differing views on the need for a rate cut, how are investors adjusting their fixed-income expectations for the first quarter?

New CPI Base Year Impact on Projections

The December reading is the final data point for the current CPI series that uses 2012 as its base year. Starting with the January data release in February, the government will move to a new CPI base year of 2024. The aim of this shift is to reflect the modern consumption patterns of Indian households in a better way.

Such a change might lead to a re-weighting of various categories within the index.

The combination of easing food deflation and rising precious metal prices has created a situation where the headline inflation number appears to be inching up. However, domestic core demand continues to remain weak.

Markets are now focused on the February policy announcement and the rollout of the new CPI series. The bigger challenge, however, will be distinguishing between temporary price shocks and more durable inflationary trends.

Global factors such as crude oil prices and trade policies remain unpredictable. As a result, the central bank’s approach to liquidity management and interest rates is likely to shape market sentiment in the months ahead.

Source

Reuters
The Hindu BL
Financial Express
MoSPI
MoSPI
Indianexpress