Retail inflation in India touched 7.35 percent in December last year, the highest in five-and-a-half-years. This might push the Reserve Bank of India (RBI) to change its policy stance and has triggered fears of a stagflation -- a period of persistently high inflation combined with high unemployment and stagnant demand.

Retail inflation, measured as consumer price index (CPI), was 5.54 percent in November and 4.62 percent in October last year. This is third consecutive month where retail inflation has breached the central bank’s medium-term target of 4 percent.

Here are some key takeaways from the data released by the National Statistics Office (NSO):

– Food inflation surged to 14.12 percent in December last year as against 10.01 percent in November.

– Vegetable prices inflation increased to 60.5 percent in December, a significant jump from 36 percent the previous month.

– Core inflation was recorded at 37 percent in December.

– Inflation rate in cereals and products stood at 4.36 percent in December.

Stagflation is a condition of slow economic growth and relatively high unemployment, accompanied by rising prices. It can also be defined as inflation and declining gross domestic product (GDP).

The government estimates GDP to grow at 5 percent in FY20, a sharp drop from the 6.8 percent recorded in FY19. In the quarter that ended on September 30, 2019, GDP growth stood at 4.5 percent.

“Along with slowing growth, more-than-desirable inflation raises the sceptre of stagflation,” analysts at rating agency CRISIL told PTI.

Rupa Rege-Nitsure, Group Chief Economist, L&T Financial Holdings, said the current stagflationary phase is due to supply shocks in the food and fuel sectors and adverse base effect.

A point seconded by Dr Soumya Kanti Ghosh, Group Chief Economic Adviser, State Bank of India (SBI). He believes RBI missed the bus in cutting rates in December. “Our worry is that if the food price inflation does not mean revert, we can slip into stagflation.”

However, Nikhil Gupta, Chief Economist, Motilal Oswal Financial Services, feels it may be an over-exaggeration to call India in stagflation as growth is still over 4 percent. However, he feels that the debate over rate hikes may get serious given the backdrop of lower savings.

The central bank had kept its key interest rates unchanged in its last monetary policy review in December 2019, and it is still unclear if they will pause or cut rates in February.

The RBI's repo rate is currently 5.15 percent and policy stance is 'accomodative'.

The RBI has projected consumer inflation at 4.7-5.1 percent from October-March.

“The RBI’s concerns over second-round effects from food inflation and the recent rise in inflation expectations mean the easing cycle has ended,” Darren Aw, Asia Economist at Capital Economics, Singapore told Reuters.

Ghosh too feels RBI will possibly remain on hold in 2020 going by current trends.

Aw added that he expects the RBI to maintain its interest rates in February.

The Monetary Policy Committee (MPC) will next meet from February 4-6.