Retail inflation quickens to 2.1% in August, snaps 9-month falling streak

Introduction

In August 2025, India’s retail inflation (measured via the Consumer Price Index, or CPI) rose to about 2.07-2.10% year-on-year, up from approximately 1.55-1.61% in July. This marked the end of a nine-month period in which inflation had been continuously falling.

This rise is modest, and inflation remains well within the Reserve Bank of India’s (RBI’s) target band of 2-6%. However, the shift raises questions about its drivers, implications for policy, and what might lie ahead for inflation dynamics.

Drivers of the Uptick in Inflation

1. Fading Base Effects
   The earlier months of inflation decline were aided by strong base effects—that is, comparisons to a year ago when prices were already high in some categories. As these base effects fade, the year-on-year rate naturally shows a pick-up even if month-on-month changes are mild.
2. Food Prices
   A key factor was that the pace of decline in food prices eased. While some food items continued to show falling prices, the extent of those falls got smaller. For instance, the contraction in vegetable prices moderated (vegetables still down ~15-16% year-on-year in August, but less steep than earlier months) . Other items like meat, fish, oils, fats, eggs, and personal care also saw price hardening.
3. Urban vs Rural Differentials
   Inflation increased in both urban and rural areas, but more so in urban regions—urban inflation reached about 2.5% versus around 1.7% in rural areas in August. This suggests that rising non-food prices (services, personal care, etc.) and possibly transport/energy costs may be contributing more in urban settings.
4. Core Inflation Stability
   Excluding volatile food and fuel items, core inflation has remained rather steady, at or around 4.1-4.2%. This indicates that while headline inflation is rising, underlying inflation pressures are not accelerating dramatically. But the persistence at these levels merits attention.

Implications

1. Monetary Policy
   Given inflation is still well below the upper bound (6%) of RBI’s tolerance band, there is policy space. Some economists believe this uptick may be temporary, and with food inflation moderating, other reliefs such as Goods & Services Tax (GST) cuts could help. Rate cuts may still be possible later in the year, provided growth remains weak or downside risks materialize.
2. Consumer Impact
   For households, even modest inflation increases can squeeze budgets—especially low-income groups which spend a larger share on food. Hardening in items like meats, oils, eggs, and personal care will be noticed. On the flip side, some food items (like pulses, certain vegetables) still remain in deflation, alleviating some pressure.
3. Food Supply and Climate Risks
   One risk factor is weather. Above-normal rainfall in August and forecasts of continued heavy rains in September may affect summer-sown crops (rice, soybean, pulses, etc.), potentially pushing food prices upward further. So, food inflation could worsen if supply disruptions occur.
4. Fiscal & Tax Measures
   The role of tax cuts—both GST reductions and other indirect tax reliefs—will be important. These measures could help offset inflationary pressures by reducing the effective prices of many consumer goods.

Outlook

Looking ahead, several scenarios are plausible:

• Moderate Inflation Path: Inflation may stay in the range of 2.5-3.5% for the rest of the fiscal year if food price pressures are contained, GST cuts are passed through, and base effects remain favourable. Some forecasts already revise expected inflation downward for FY26 on those grounds.
• Potential Upside Risks: If weather events damage crops (reducing supply), or if global commodity prices (oils, metals, etc.) surge, inflation could creep up more than current forecasts. Also, any disruptions in logistics or supply chains could exacerbate price pressures.
• Monetary Policy Response: The RBI is likely to tread carefully. Given inflation remains within the target band, the central bank may continue to hold interest rates for now, with possible cuts later in the year if inflation stays subdued and growth weakens.

Conclusion

The August 2025 data on retail inflation marks a turning point: the nine-month decline has been interrupted by a modest rise to around 2.07-2.10%. While this is still low by historical standards and within the RBI’s comfort zone, it signals that deflationary or ultra-low inflation headwinds are easing. Key drivers are the moderating fall in food prices, fading base effects, and rising prices in non-food categories.

Policy makers will need to monitor food supply and climate risks, the execution and pass-through of tax reliefs, and the momentum in core inflation to ensure that this uptick does not evolve into a more sustained inflationary trend. For consumers, the impact is likely to be felt in certain food and daily consumption items; for monetary policy, there remains room for easing, but prudence will dominate.