January’s retail inflation figure of 6.5 per cent comes as a shock, reversing the downtrend in inflation in the third quarter of this fiscal (from 6.8 per cent in October 2022 to 5.7 per cent in December 2022, averaging 6.1 per cent). Only on February 8, the Reserve Bank of India laid out its inflation expectations for the year ahead, with its projection of 5.7 per cent for this quarter. That projection is likely to be overshot by some margin.

Disconcertingly, January’s inflation comes on a high base of 6.01 per cent in January 2022. It is clear that core inflation (non-food, non-fuel) has become a major driver in recent months, unhinging inflation expectations and leading to second-round effects of the initial war-induced shocks. The RBI may be forced to consider an extra rate hike or two, if this uptrend continues.

True to the trends for about a year, rural inflation at 6.85 per cent last month (6.12 per cent last January) has been higher than urban inflation at 6 per cent (5.9 per cent last January). This is because food, which has a higher weightage in the CPI-rural basket than its urban counterpart, has been a major driver of the price rise. This time, cereals inflation was up to 16 per cent, and has been a major driver as it accounts for a weight of over 12 per cent in the index. With prices of meat and eggs, milk and milk products and snacks and sweets too spiking 6-9 per cent, it seems that transport costs as well as high wheat prices are playing a role. However, the most notable feature of the January data is that inflation is generalised across products and services. Household goods and services, education, health, recreation and personal care and effects are all well above 5 per cent, and on a high base – which suggests that expectations are at play. The RBI is right in its implicit assessment that inflation is no longer just a cost-push feature, although it began that way a year back. However, the Centre should consider another round of reduction in excise duties on fuel to anchor expectations on its part. Pump prices are likely to have played a role in inflationary expectations as well.

The inflation figures when read with last week’s sluggish factory output data, suggest that businesses are bracing for a period of uncertainty and are perhaps holding back. The index of industrial production recorded a growth of 4.3 per cent in December (2.6 per cent in manufacturing, mining 9.8 per cent and electricity 10.4 per cent), and was up 5.4 per cent in April-December. While private capital expenditure pick-up still remains a nascent phenomenon, it will stall if inflation continues this way. Both, the Centre and RBI must work in concert to check price rise. The social and economic costs of generalised price rise are too serious to be ignored.