Falling inflation and its durability

Udayan Hazarika

(The writer can be reached at udayanhazarika@hotmail.com)

In the last fiscal year, the reigning retail inflation had put tremendous pressure on us, and it was like a never-ending affair. It ruled for almost the first three quarters and in December showed a sign of relaxing its grip. It started with 4.83 per cent picking it in October 2024, with 6.21 per cent—which was the highest in 14 months, i.e., since August 2023, when inflation crossed the level of 6.83 per cent—and finally coming down to the level of 4.26 per cent in January 2025. Although the easing started in November, it remained within the 5 per cent limit until January. It took almost 10 months to reach the upper end of the RBI’s comfort limit, which is set at 4 per cent. The recent data on inflation released by the MOSPI shows that headline inflation has registered a gradual fall since November, with 5.48 per cent, then 5.22 per cent in December, and then finally 4.26 per cent in January 2025. Needless to say, this accelerated rise in headline inflation was generated by the steeply rising consumer ’price food index. In October 2024, when CPI inflation was 6.21 per cent, the CPFI inflation picked up and rested at the level of 10.87 per cent. The level was tremendously high and was sufficient to dampen the policymakers’ spirit. It was then that many were speaking about detaching some food items from the CPI basket whose volatile prices have added fuel to the fire. RBI and many others, however, did not agree to that. The RBI policy forwarded in November 2024 was rightly tuned for the economy, and as expected, as soon as the kharif season started, prices of food items started dropping. By November 24, CPFI inflation started falling to the level of 9.04, leading to a fall in the CPI inflation to 5.48 per cent. It has fallen gradually since then. In December, the food inflation further declined to 8.39 per cent, and then there was a quantum jump in January 2025 when it fell to 5.97 per cent, leading to a fall in the CPI inflation to the level of 4.26 per cent. It was in February that the CPFI, which so far had remained above the CPI, had crossed their path in their downward travel, registering inflation at 3.75 per cent and CPI inflation at 3.61 per cent. The story is then reversed, and undoubtedly there are external forces working behind this, to which we will come later.

Mospi’s recent data on inflation shows a fall in the rate of headline inflation in April 2025 of 18 basis points, from 3.34 per cent to 3.16 per cent, compared to March 2025, and a further fall to the tune of 2.82 per cent in May 2025, depicting a decline of 34 basis points, i.e., in all, 52 basis points in a two-month period. This is reported as the lowest year-on-year inflation after February 2019—i.e., the pre-Covid-19 period. The detailed break-up of the data shows that the food inflation based on CFPI has gone down to the level of 1.78 per cent (provisional) in April 2025 compared to the 8.70 per cent of the same period of the previous year. The calculated rural rate, however, reigns higher at 1.87 per cent than the urban rate of 1.64 per cent. There has been a sharp decline of 91 basis points in CFP-based inflation as compared to March 2024 (2.69%). It may, however, be noted that the rate of fall in the wholesale inflation was only 0.4 per cent, which is the lowest in more than a year. The index for its major component, namely primary articles, declined from 184.4 (provisional) in April 2025 to 184.3 in May 2025, registering a decline of 0.05 per cent. Similarly, for fuel and power, the April index was 148.1 (provisional), which declined to 146.7 in May 2025, registering a decline of 0.95 per cent. As regards manufacturing products, which hold a weightage of 64.23 per cent of the total, there was no change in its index over the month, and it remained static at 144.9 (provisional). The wholesale price index for food articles, however, increased from 189.3 in April 2025 to 189.5 in May 2025. Despite this rise in index value, however, the inflation rate of WPI for food articles declined from 2.55 per cent in April 2025 to 1.72 in May 2025 (provisional). Thus, on the whole, the inflation rates based on WPI have also declined during the April-May period from 0.85 to 0.39 or 0.4 per cent, which happens to be the lowest in more than a year.

Now, despite the fact that the rate of inflation is within our absorbable limit and that it has still been maintaining the trend of descension for almost a year now, people at the helm of affairs are still not sure about its sustainability. The basic question that keeps coming to mind is how long this situation will last. This is mainly for two reasons: 1) the volatile situation generated by the war in the Middle East and 2) the unpredictable monsoon this year. Along with the falling food prices, another factor that is accountable in this context is the significant fall in the crude oil and natural gas prices, which has been estimated at 12.4 per cent in the international market. This has resulted in the lowering of the oil bill, leading to a fall in the volume of imports. This is also instrumental in bringing down our balance of payment deficits. But how long this situation will prevail is the question. It may be recalled that on June 13—the day Israel attacked Iran—oil prices jumped up as much as 8 per cent in one day. If the war at the Gulf continues, there is every possibility that Iran may resort to penal action on the world communities by blocking the Strait of Hormuz. The Strait of Hormuz is located between Saudi Arabia and Iran, connecting the Persian Gulf with the Gulf of Oman and the Arabian Sea. In case Iran is seriously thinking about this blocking agenda, the shipping cost of fuel will be almost double the existing cost and will result in another shooting up of the import bill. As India imports about 80 per cent of its fuel requirements, the resultant increase in the fuel prices will shoot up the carrying charges of all commodities. Coupled with this, the delayed monsoon this year will have a bad impact on the kharif crops and the possible El Niño phenomenon on the rabi crop. The delayed and slow production will lead to slow supply with high prices, which will eventually push up the food prices and inflation. Thus, by the end of the third quarter this year, there is every possibility that inflation will come back loaded with all the potential to disrupt the price situation.