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Economy Watch: Inflation Modest in December

16 January 2018

As wholesale inflation eased to 3.58% in December, Indian industry on Monday urged the Reserve Bank of India (RBI) to reduce key policy rates to augment investments and boost economic growth.

However, this was partially offset by an increase in tobacco and fuel prices, after duties rose following the Autumn Budget.

The Office for National Statistics reported on Tuesday that consumer price inflation was 3 per cent in the month, down from the 3.1 per cent in November.

The downward effect in December came "mainly from air fares, along with a fall in the prices of a range of recreational goods, particularly games and toys", the ONS said today.

Official wage figures out next week will show whether there has been any improvement in the gulf between inflation and wage growth.

However, pressure in the pipeline grew as factory gate prices rose, confounding predictions of a fall.

The ONS says following a steady increase from late 2015, since April 2017 the CPIH rate has levelled off, ranging between 2.6% and 2.8%.

"We expect the benchmark repo rate to be held unchanged at 6 per cent next month", the report said.

The lion's share of the downward pressure on inflation in December came from air fares
The lion's share of the downward pressure on inflation in December came from air fares

The rising trend in inflation although supports a pick-up in industrial production, has dashed hopes of monetary easing in the near future.

The European Central Bank has a firm mandate to keep a lid on inflation, and overall in the eurozone consumer prices remain subdued at 1.5% - a key factor in recent policymaking as the ECB governing council remains "accomodative" and continues its tapered asset purchase programme until September.

Commenting on the ONS figures Paul Hollingsworth, senior United Kingdom economist at Capital Economics, said: "The fall-back in CPI inflation from 3.1% in November to 3% in December marks the beginning of what we expect will be a sustained downward trend over the course of this year".

The Bank of England has previously said it expected the CPI to peak in the final months of 2017, before falling back to about 2.4% at the end of this year.

Inflation rose sharply in the wake of the June 2016 Brexit vote due to the record slump in sterling on the night of the referendum, which fed through to higher import costs.

Consumer price inflation climbed to 1.8% in 2017 from 0.5% a year ago.

Month-on-month, inflation doubled to 0.6%, as estimated, from 0.3%.

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Economy Watch: Inflation Modest in December