The uncertain comfort on prices: Inflation may stay low but risks rise

Inflation could stay low for some time, but should be viewed with caution amid global risks and climate change

A sharp slide in consumer inflation has been the most encouraging news for the Indian economy this year. And, going by history, this phase can continue for some time. 

Inflation based on the Consumer Price Index (CPI) has been below 4 per cent in the past nine months, averaging 2.3 per cent. It reached 0.25 per cent in October, the lowest print in current CPI series, and below the Reserve Bank of India’s target range of 2 to 6 per cent. 

To be sure, there have been such episodes earlier, when average inflation was lower than 4 per cent. The longest was between fiscals 2000 and 2005, when CPI inflation averaged 3.9 per cent. The next was between fiscals 2018 and 2019, when inflation averaged 3.5 per cent. These episodes were accompanied by sustained drop in food inflation. 

Yet, the gathering dark clo­uds of geopolitical uncertainty and climate change events seems to warrant a cautious view. The factors are telltale. 

What decides how long inflation stays low? 

Food, the main driver 

All episodes of low headline inflation followed a sharp fall in food inflation, which has a 39 per cent weight in the current inflation basket. Food inflation was much lower than non-food between fiscals 2000 and 2005 (2.2 per cent versus 5.5 per cent), and fiscals 2018 and 2019 (1 per cent versus 5.2 per cent). 

In the current fiscal, too, the decline in inflation was led by food (minus 1.1 per cent in fiscal 2026 so far versus 7.3 per cent in fiscal 2025). 

Vegetables, pulses and cereals drove the decline in food inflation this fiscal. Among these, vegetable inflation is highly volatile, with large swings often creating statistical distortions. Average retail vegetable inflation, at minus 18.4 per cent this fiscal, is partly driven by a high base of 20 per cent in the last fiscal. CPI inflation excluding fruits and vegetables has been slightly higher (3.4 per cent). 

Non-food inflation has risen (4.1 per cent versus 2.9 per cent), driven by higher fuel and core inflation. 

What can keep food inflation low, & the risks 

Foodgrain production has grown every year for the past nine years, an unprecedented period of continuous growth. Little surprise then that foodgrain stocks have stayed above the buffer norms. 

In addition, the cuts in the goods and services tax (GST) will bring one-off relief on some food items, such as milk products and processed food, reducing food inflation over the next 12 months. 

The revision in the CPI base year to 2022-23 from an outdated 2011-12 will also reduce the weight of food and, hence, its influence on the headline CPI inflation. 

The central government’s free food programme, launched during the pandemic, has been extended till 2028. It provides free foodgrains to 800 million Indians — roughly two-thirds of the country’s population — easing the food price burden for the masses materially. If the scheme is incorporated in the CPI series, food inflation will come down. 

Ahead of the new CPI series, expected in early 2026, the Ministry of Statistics and Programme Implementation has proposed including the free food scheme and other food programmes in the CPI. A single index for a given food item (say, rice) will be produced, as opposed to the current practice of separate series of public distribution system (PDS) and non-PDS variants. If implemented, this will bring the consumer food price index down. 

The risk to food inflation, however, is climate change, which, over time, will reduce yield and nutritional quality of crops. Not only is the frequency of extreme weather events rising but their nature also varies widely — from heatwaves to excess rains — and their trajectory is difficult to predict. These may cause intermittent spikes in food inflation. 

For a structural decline in food inflation, there is a need to raise productivity and climate-proof agriculture. Government initiatives, such as promoting heat-resilient crop varieties and food processing infrastructure, must remain a priority to ensure India’s food sufficiency is resilient to growing climate risks. 

Watch out for rising energy demand 

A decline in crude oil prices this year has helped keep fuel inflation stable averaging 2.5 per cent so far in this fiscal. According to various estimates, crude oil price will hover around $65 per barrel this year, and is expected to fall further in the next. 

A global demand slowdown and the shift towards electric vehicles structurally favour a reduction in crude oil prices. However, geopolitical uncertainties and sanctions pose an upward risk. 

Besides, fuel inflation isn’t solely dependent on crude oil. Electricity is becoming an increasingly important energy source. With the rapid growth of data centres, a shift towards energy-intensive infrastructure and manufacturing, the growing need for air conditioning due to more frequent heat waves, and rising incomes, the demand for electricity is expected to accelerate. If supply doesn’t keep pace, this could exert pressure on fuel inflation in the coming years. 

Core inflation faces a mix of upside, downside factors 

Core inflation (CPI excluding food and fuel) has risen this year (4.2 per cent versus 3.5 per cent last fiscal), driven by surging gold and silver prices. Excluding gold, the rise has been milder (3.4 per cent versus 3 per cent). 

The rise in core inflation (excluding gold) reflects the gradual improvement in demand conditions. Services like housing, education, health, beauty services, and air travel have grown, reflecting buoyant services activity. 

The GST cuts will lead to a one-time reduction in output prices for some core items, such as automobiles, white goods, and beauty services. 

However, with GST unchanged for most services, services inflation is likely to be stickier than goods inflation. 

Input cost trends for core inflation vary. While input cost pressures for producers from food and crude oil have eased, these have risen from higher global prices of basic and precious metals. 

Excess capacity in China is exerting deflationary pressures on several products. There has been some impact on India. On-year growth in goods imports from China has been steady in value terms. But, in volume terms, imports of Chinese chemicals, metal products, toilet articles, cloth fabrics, machinery, and toys have risen. 

In the short term, macroeconomic factors and GST provide favourable conditions for low headline inflation and keep the monetary policy space for rate cuts open. The revision of the CPI base year to 2022-23 will bring stability via reduced weight of volatile food. 

In the medium to long term, however, rising weather disruptions and energy demand are potential sources of pressure. Addressing these will be critical to sustain inflation at 4 per cent. 

Dharmakirti Joshi is Chief Economist, and Pankhuri Tandon is Senior Economist at Crisil Ltd