Data released by the Central Statistics Office showed food inflation fell to 0.53% in January 2017, from 1.37% in December 2016.
The annual increase was below consensus forecasts for a steeper increase to 1.9%, although this was still the highest annual rate since June 2014.
The increase in the inflation rate takes it closer to the Bank of England's target rate of 2%, which has not been reached for more than three years.
But a pick-up in global crude prices, a volatile foreign exchange market, and relatively high domestic non-food and non-fuel inflation have fuelled concerns among RBI officials.
Food inflation rose by 2.7% over the year, up from 2.4% in the previous month, while non-food prices jumped by 2.5%, again above the 2.0% level reported previously. While rising demand and higher commodity costs are reviving price pressures in the production pipeline, renewed strength in the dollar may pose a headwind. "The base effects that have boosted inflation in recent months are soon going to go into reverse", he said, adding that prices have already peaked.
Inflation looks set to breach the central bank's 2% target next month, Paul Hollingsworth, a United Kingdom economist at Capital Economics, said.
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The 0.6% gain in the producer-price index followed a 0.2% advance the prior month, a Labor Department report showed Tuesday.
Wholesale prices of goods increased 1% in January, the most since May 2015, with half of the gain being due to a 12.9% surge in gasoline prices.
Consumer Price Index inflation or retail inflation cooled to a five-year low of 3.17% in January 2017 compared to 3.41% in December as the impact of demonetization played out in the economy.
In pulses and products category also, the rate of price rise was negative at (-) 6.62 per cent. "Meanwhile, some members of the Monetary Policy Committee are clearly becoming twitchy at the pace at which inflation is now rising and the potential overshoot of the 2.0% target rate".
An economist from Icra, however said that fuels are unlikely to put extra pressure on retail inflation in the near term.