Sharp fall in food prices; CPI records lowest level since Feb 2019

POINTS TO PONDER

1. The road ahead may have many unforeseen turns. Nevertheless, lower inflation exhibits the macroeconomic stability of India, and to a certain extent, positive impacts in the wake of reciprocal tariff threats.
2. In real terms, the real return on investment is the difference between the rate of interest and rate of inflation.

Headline inflation (year-on-year) based on All India Consumer Price Index (CPI) for the month of May 2025 declined to 2.8%, hitting its lowest level since February 2019.

There is a decline of 34 basis points in headline inflation for the month of May 2025 as compared to 18 basis points fall in April at 3.16%, recording the lowest monthly inflation rate in over six years, according to official data released by the National Statistics Office on Thursday.

The decline in headline inflation is attributed to the decline in inflation of pulses, vegetables, fruits, cereals, household goods and services, etc.

“There is a correlation between inflation and interest rates. The inflation hit its 75-month low since Feb 2019, largely driven by the softening of food inflation. Policymakers, indeed, deserve credit. The lower inflation exhibits the macroeconomic stability of India, and to a certain extent, positive impacts in the wake of tariff threats by the US administration. 

“India, is in fact, a winner in the tariff tensions. The fall in inflation is a relief to retail depositors as their real return on investment will increase. In real terms, the real return on investment is the difference between the rate of interest and rate of inflation. The proposed reduction in the deposit rates by banks due to the jumbo rate cut will be offset to an extent and the higher inflation adjusted return,” R Madhusoodanan, a financial expert and former senior SBI official told The Free Press Journal.

“If inflation pressures rise, emerging market central banks will need to respond quickly using policy rates to prevent higher inflation from getting entrenched as they did during Covid-19. We must recognize that the road ahead may have many unforeseen turns, which calls for further strengthening financial and fiscal resilience and navigating with monetary policy clarity, credibility, and discipline,”  according to Gita Gopinath, first deputy managing director of IMF.

Food inflation rate based on All India Consumer Food Price Index for the month of May 2025 over May 2024 stood at 0.99%.  A sharp decline of 79 basis points was observed in food inflation in May as compared to April, indicating the lowest after October 2021.

As far as rural inflation is concerned, it observed a significant decline in headline and food inflation. The headline inflation is 2.59% while the same was 2.92% in April. The CFPI based food inflation in the rural sector is observed as 0.95% as against 1.85% in April.

Urban headline inflation indicated a decline from 3.36% in April to 3.07% in May. Sharp decline is observed in food inflation from 1.64% to 0.96% in May. Year-on-year housing inflation for the month of May stood at 3.16%. The combined education inflation for both rural and urban sectors stood at 4.12%.  Health inflation stood at 4.34%. Transport and communication indicated an inflation of 3.85%, and fuel and light 2.78%.Assuming a normal monsoon, RBI has projected CPI inflation for the financial year 2025-26 at 3.7%, with Q1 at 2.9%, Q2 at 3.4%, Q3 at 3.9%, and Q4 4.4%.