By KR Shanmugam
As India sees a dramatic fall in retail and wholesale inflation, the headline numbers look benign at first glance. However, beneath the surface the picture is more complex, driven by a mix of real price declines, temporary base effects, and sticky underlying inflation expectation, explains KR Shanmugam
Vegetables and food prices are driving decline
India is experiencing one of its sharpest disinflations in recent years. In October, retail inflation based on the Consumer Price Index (CPI) plunged to around 0.25% year-on-year, the lowest recorded in the current CPI series. Food, especially vegetables, is the biggest driver behind this sudden softness. The food inflation in the CPI was down about -5% over the last year, while vegetables in the CPI basket fell nearly 27% year-on-year.
Wholesale prices showed an even sharper correction: vegetables in the WPI contracted by almost 35%, with potatoes falling nearly 40%, and onions more than 60%. Pulses too saw steep price corrections, with wholesale pulses falling around 16.5%. Even fuel and power within the WPI reported deflation of about -2.5%.
On the other hand, manufactured goods inflation within WPI moderated significantly, indicating that the decline is not limited to a select few categories of perishable food items. It is broad-based and linked not just to global commodity softness but also to improvement in domestic supplies.
Core inflation tells a different story
On the consumer side, the fall in broader inflation is more muted once we strip out volatile categories. Core CPI, which excludes food and fuel, stays at around 4.4%. This points to the fact that the underlying trend for many essential items continues to run hot, compared with the headline. This is where many of the everyday expenses that matter to families sit: rent, school fees, medicines, transport, restaurant meals, and services of all kinds. These costs haven’t fallen. If anything, some have quietly crept up. Further, part of this is because higher domestic gold prices feed into the CPI’s miscellaneous category. Since gold is a classic inflation-hedge asset, rising gold prices often reflect higher inflation expectations, not current inflation. The divergence between wholesale prices and retail core inflation underlines the point that this disinflation is powered by favourable supply conditions and statistical effects rather than a collapse in demand.
Why are prices falling?
This has been the result of several forces acting in concert: bumper harvests, better flow of supplies, and easing weather disruption have increased the supply of vegetables and other perishables. In contrast, supply disruptions had pushed up prices last year, creating a strong base effect this year. Government tax measures, including goods and services tax reductions on select items of consumption, have also weighed on retail inflation. On the wholesale side, softening global prices of oil, metals, and farm commodities have pushed WPI into negative territory. The price decline is partly real, partly statistical exaggeration due to a high base, and partly the outcome of policy nudges.
The paradox of low inflation
In economic theory, persistently low inflation helps and also complicates growth. It stabilises interest rates, lowers uncertainty, and safeguards real incomes, giving central banks room to cut rates to support growth. But very low inflation, especially demand-driven, hints at economic slack, raises real borrowing costs, and can dampen investment and consumption, risking a “low-inflation trap”. Empirical literature shows disinflation benefits growth only when paired with strong labour-market income and healthy credit transmission. India’s disinflation is mostly supply-led, making it less worrying. But without stronger income growth, particularly in rural and informal sectors, low inflation alone may not revive consumption.
At the wholesale level, India may remain in deflation if commodity markets stay subdued. CPI is expected to stay low, but not deeply negative in a sustained way. Core inflation’s persistence and the inherent volatility of food prices make broad-based negative CPI unlikely unless domestic demand weakens greatly. Brief spans of negative CPI are possible, especially if vegetable prices stay low, but prolonged deflation seems unlikely.
Gap between data & sentiment
Despite the dramatic drop in official figures, inflation expectations remain high. This is because households experience inflation through a very different lens than that of economists. Prices of things households spend on (rent, education, health care, eating out, transport, utilities) aren’t falling, and many are still rising. Secondly, expectations reflect years of elevated inflation rather than one or two unusually low monthly readings. Interestingly, India’s CPI rose 0.15% in October, up from 0.10% in September.
So, the disinflation in India is real in many ways but exaggerated by a favourable base and volatile food items. While wholesale prices indicate a broad decline, consumer core inflation remains resilient, and the experience of households does not quite align with the headline numbers. Whether this turns out to be a stable phase of low inflation or a statistical blip depends on food supply conditions, global commodity movements, and domestic demand. For now, the gulf between data and sentiment is wide.
The writer is former director, Madras School of Economics, and economic consultant, Tamil Nadu government