For the 14th month in a row, wholesale prices fell in December but the rate of decline at 0.73 per cent was the slowest in last one year as food prices shot up, indicating return of inflationary pressures ahead of RBI's monetary policy review.
The Wholesale Price Index based inflation, which has remained in the negative zone since November 2014, has inched up in the last four months. It was (-)1.99 per cent in November.
In December 2014, however, it was (-)0.50 per cent.
Food inflation shot up to 8.17 per cent in December as against 5.20 per cent in the previous month.
Inflation in pulses and onion was 55.64 per cent and 25.98 per cent respectively. The rate of price rise in case of vegetables was 20.56 per cent during December and for fruits it was 0.76 per cent.
Industry body Ficci said continuation of the deflationary trend was an indication of weak demand in the economy. "We hope that the central bank will respond to the situation appropriately and take steps that would aid the process of industrial recovery."
The Reserve Bank may also face pressure to reduce the key lending rate further as industrial production contracted by 3.2 per cent in November, its sharpest decline in four years.
Besides IIP, the central bank also looks into retail inflation data while firming up its monetary policy stance.
Retail inflation has been rising for 5 straight months and was 5.61 per cent in December. RBI's next bimonthly policy review will be unveiled on February 2.
Industrial output contracted by 0.8 per cent in April, the
first decline in three months, due to drastic fall in capital goods production and manufacturing activities.
Assocham said the declining trend in IIP and rising WPI may have negative impact in the long run since it states that prices may have risen due to a cut in supply.
The hardening of inflation could further dent the chances of an interest rate cut by the apex bank in its policy review in the months ahead.
In its policy review earlier this month, RBI had retained January 2017 retail inflation target at 5 per cent, though with an upward bias on account of firming of oil prices and implementation of 7th Pay Commission recommendations.
As per the inflation data, prices of egg, meat and fish paced up by 9.75 per cent and in cereals and fruits the rise was 4.60 per cent and 3.80 per cent. However, kitchen staple onion continued to witness decline at (-)21.70 per cent.
"Globally there has been some bottoming of commodity prices, which will get reflected in the WPI going forward. We believe that a range of 2-3 per cent should not be worrisome for the economy and a normal monsoon should ensure the same," CARE Ratings said.
After two consecutive years of drought, the Indian Meteorological Department has predicted an 'above normal' monsoon this year.
