India's Consumer Price Index (CPI) inflation for December registered 1.3% on an annual basis, falling below both consensus estimates and brokerage forecasts, reinforcing expectations that inflation will remain well below the Reserve Bank of India's 4% target in the coming months. The reading, while higher than November's 0.7%, undershot UBS's forecast of 1.4% and the broader consensus estimate of 1.6%.

Inflation Breakdown and Regional Variations

The December inflation data revealed significant variations across different categories and regions. Urban areas recorded higher inflation at 2.00% annually compared to rural areas at 0.80%. Core inflation increased to 4.60% from the previous 4.30%, driven primarily by higher gold prices, while core inflation excluding gold remained stable at 2.60%.

HSBC noted that 75% of items in the CPI basket are currently below the 4% inflation mark, according to its diffusion index. The sequential momentum showed a 0.70% month-on-month increase on a seasonally adjusted basis, attributed to base effects as December 2024 had recorded 5.20% annual inflation.

Food Deflation Continues for Fourth Month

Food inflation remained in deflationary territory at -2.70% annually, improving from November's -3.90% but marking the fourth consecutive month of food price deflation. Month-on-month food prices declined 0.20%, led by vegetables which fell 2.90%, along with cereals and pulses.

However, protein-rich items showed sequential improvement with eggs rising 6.00% month-on-month and meat and fish increasing 1.80%. Milk and milk products, spices, and oils and fats also registered increases. Specific vegetables like tomatoes surged 22.00% month-on-month, alongside cauliflower and onions, driven partly by festive demand.

Gold Emerges as Key Inflation Driver

Both UBS and HSBC highlighted gold as a significant contributor to core inflation. Gold prices surged 69.00% annually in December, and with its 1.10% weight in the CPI basket, gold alone accounts for approximately 75 basis points of CPI inflation. This substantial contribution underscores the impact of commodity price movements on India's inflation dynamics.

Policy Implications and Outlook

The subdued inflation environment has implications for monetary policy. CPI inflation averaged 0.80% annually in the December quarter, marginally above the RBI's 0.60% estimate. UBS expects headline CPI inflation to average 1.90% in FY26, slightly below the RBI's 2.00% forecast.

The RBI has already reduced the policy rate by 125 basis points, bringing the repo rate to 5.25%. UBS anticipates the central bank will maintain a wait-and-watch approach in the February policy meeting, focusing on monetary transmission and liquidity support measures.

Structural Changes and Future Monitoring

The December data represents the final CPI reading using 2012 as the base year. A new CPI series with 2024 as the base year will be released on February 12, though HSBC expects this change will not alter the benign inflation outlook despite potential differences in consumption basket and methodology.

Both brokerages expect inflation to remain below the RBI's 4% target in coming months, supported by strong cereal production, well-stocked granaries, winter disinflation effects, low global oil prices, and cheaper imports from China, which should keep core inflation soft for an extended period.

India's Consumer Price Index (CPI) inflation rate accelerated to 1.33% year-on-year in December, according to official data released recently. This represents a notable increase from the previous month's inflation rate of 0.71%, indicating upward pressure on consumer prices across the economy.

Inflation Performance Against Expectations

Despite the month-on-month acceleration, the actual inflation figure came in below market expectations. Economists had estimated the December CPI inflation to reach 1.56%, making the actual reading of 1.33% a modest surprise to the downside.

Price Dynamics Analysis

The December inflation data reveals the evolving price environment in the Indian economy. The increase from 0.71% to 1.33% represents a significant month-on-month acceleration of 0.62 percentage points, suggesting that various factors may have contributed to rising consumer prices during the period.

The fact that actual inflation remained below economist estimates of 1.56% indicates that while price pressures increased, they were somewhat more contained than market participants had anticipated. This suggests a measured pace of price growth rather than an aggressive inflationary surge.

Economic Implications

The CPI inflation reading provides important insights into the current state of consumer price pressures in India. At 1.33%, the inflation rate remains at relatively low levels historically, though the upward trajectory from the previous month's 0.71% warrants attention from policymakers and market observers.

The data points to a gradual increase in price pressures while maintaining levels that are generally considered manageable within the broader economic context. The below-estimate reading may provide some relief to those concerned about rapid price acceleration in the economy.