Explaining the collapse in India's retail inflation | Number Theory

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Retail and wholesale inflation numbers for the month of September were released on Monday and Tuesday. While retail inflation, as measured by Consumer Price Index (CPI) stood at 1.5%, wholesale inflation, as seen in the Wholesale Price Index (WPI), collapsed to just 0.1%. What explains this unusually benign inflation environment? What are its larger economic implications? Here are four charts which answer these questions.

Representational image. (Bloomberg)

Explaining the collapse in India's retail inflation

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  Quarter ending September 2025 has the lowest retail inflation with also zero wholesale inflation

  While monthly inflation numbers are tracked commonly, quarterly and even annual numbers are more significant to make sense of larger policy implications. Retail inflation collapsed to an all-time low of 1.7% in the September quarter while wholesale inflation was almost zero. To be sure, WPI has also contracted on a quarterly basis on many occasions in the past. However, what makes the September quarter inflation numbers remarkable is both the CPI and WPI numbers ending up low.
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  This will likely lead to a collapse in the nominal growth component in September quarter GDP data

  One of the biggest macroeconomic implications of both retail and wholesale numbers is that the nominal growth component in the September quarter GDP numbers will likely collapse; the data will be released in November. The 2025-26 Union Budget has assumed a nominal GDP growth of 10.1% and nominal GDP growth rate was 8.8% in the June quarter numbers released in August against the real growth rate of 7.8%.
• Retail inflation has been consistently surprising RBI this year by ending up lower

  The Monetary Policy Committee (MPC) of RBI released its first annual projection for retail inflation for 2025-26 in its February 2025 resolution. CPI was expected to grow at 4.2% back then. Since then, MPC has consistently reduced its inflation projection in every forecast with the October resolution putting it at 2.6%. Most analysts expect 2025-26 inflation to end up even lower after the latest monthly data.
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  The lower-than-expected retail inflation numbers are primarily on account of a collapse in food inflation

  Quarterly food inflation was 9.4% in the quarter ending December 2024, which must have been the latest data point when MPC made its first inflation forecast for 2025-26 in February. The period since has seen a spectacular fall in food inflation with the September quarter number entering the deflation zone. Food prices have a share of 39% in the current CPI basket. It is this downward trajectory in food inflation which has pulled the headline number down despite the non-food component actually staying above the 4% mark in the quarters ending June and September.
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  Even within food, the collapse is primarily because of vegetable prices

  What explains the sharp downward trajectory of food inflation in the CPI basket? The short answer is vegetable prices. Almost 15% of the CPI food basket is vegetables. While overall food inflation collapsed to show a contraction of 1.6% in the quarter ending September, food inflation after excluding vegetables was significantly higher at 2.9% in this period. To be sure, even food inflation excluding vegetables has fallen compared to previous quarters with the numbers coming down from 4.8% in the quarter ending March to 3.7% and 2.9% in the subsequent periods. One of the implications of the food inflation collapse primarily being on account of vegetables could be that its adverse terms of trade impact – when food prices fall disproportionately compared to non-food prices – may still be limited to a part of the farm economy rather than leading to a more widespread agrarian distress.