Producer price index, which measures price changes before they reach consumers, increased 0.6 percent between January and December, the Labor Department said Tuesday.
Even though the retail inflation is well below Reserve Bank of India's target of 5 per cent, it is unlikely that the central bank will go for a rate cut in the coming months.
Annual rate of inflation was 3.39 per cent for December 2016 and minus 1.07 per cent in January 2016.
Separate ONS data showed prices paid by factories for fuel and materials rose at an annual rate of 20.5 percent in January, the sharpest rise since September 2008.
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Sterling's slump against the United States dollar and the euro since the European Union referendum result, coupled with rising oil prices, also caused import prices to leap 20.2% over the period, the ONS said.
An increase in global crude prices lifted prices in oil and natural gas exploitation, which contributed to the expansion, NBS analyst Sheng Guoqing said in a statement. Final demand, excluding energy, food and trade services also rose 1.6 percent year-on-year.
Within the core CPI basket, rents increased 0.3 percent last month after a similar gain in December.
Separate figures for the producer prices index (PPI) showed that input prices - the amount paid for materials and fuel by United Kingdom manufacturers - saw its highest rate of growth since September 2008, jumping 20.5 per cent in January.
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RBI has projected retail inflation in the range of 4 to 4.5 percent in the first half of 2017-18 fiscal and between 4.5 percent to 5 percent in the second half.
Bank of England Governor Mark Carney has outlined how policymakers are prepared to look through this increase in inflation, keeping policy on hold amid the heightened uncertainty that the United Kingdom economy faces during the process of withdrawing from the EU.
Prior to the Brexit vote, inflation stayed between -0.1% and 0.1% for 10 months due to a collapse in oil prices and a supermarket price war that led to slashed prices. "The Bank of England's now neutral stance is significantly supported by its latest estimate about the amount of spare capacity in the economy, however if the path of CPI is stronger than it now estimates, we may eventually see a stronger reaction from the central bank".
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