Even as core inflation surges, annual estimates for retail inflation based on Consumer Price Index (CPI) are on the decline, with Barclays on Friday joining the Monetary Policy Committee (MPC) and SBI in cutting the print to 3.5 per cent.

Core inflation refers to headline inflation minus food and fuel inflation. Movement in core inflation indications long-term trends in price dynamics.

“Core CPI too has been on a gradual upward trend, rising to 4.2 per cent in May 2025 from 3.1 per cent in May last year. Still, of this 110 bps (basis points) rise in core CPI, gold CPI accounted for nearly 30 per cent, disproportionately more than its 2.3 per cent weight in core CPI,” Aastha Gudwani, India Chief Economist at Barclays said in a report, titled ‘Dissecting disinflation, determining durability’.

Further, the report noted that, with recent CPI inflation outcomes persistently surprising on the downside and a favourable outlook for food prices, “we revise down our FY25-26 CPI inflation forecast by 50bps to 3.5 per cent. Lower food inflation is the key driver, even as we expect non-food CPI inflation to rise moderately.”  This is 20 bps lower than MPC’s forecast of 3.7 per cent, and at par with the upper end of SBI’s projection of 3.3-3.5 per cent.

Inflation outlook

Retail inflation continued to decline through March, April, and May, as headline inflation dipped to a 75-month low of 2.82 per cent in May. This drop was mainly led by food inflation, which recorded its sixth consecutive monthly decline. The fuel group witnessed a reversal of deflationary conditions and recorded positive inflation prints during March and April, partly reflecting the hike in LPG prices.

Earlier this month, the MPC said that the inflation outlook points toward benign prices across major components. Record wheat production and higher output of key pulses in the rabi season should ensure adequate supply of essential food items. Going forward, the likely above-normal monsoon along with its early onset augurs well for kharif crop prospects. Reflecting this, inflation expectations are showing a moderating trend, more so for the rural households.

Most projections point towards a continued moderation in the prices of key commodities, including crude oil. Notwithstanding these favourable prognoses, we need to remain watchful of weather-related uncertainties and evolving tariff related concerns which could impact global commodity prices. “Taking all these factors into consideration, and assuming a normal monsoon, CPI inflation for the financial year 2025-26 is now projected at 3.7 per cent, with Q1 at 2.9 per cent; Q2 at 3.4 per cent; Q3 at 3.9 per cent; and Q4 at 4.4 per cent,” the MOC said, while adding that the risks are evenly balanced.

Soon after May number, an SBI research report lowered its CPI forecast from 3.3 per cent to 3.5 per cent. It said that while overall CPI inflation is moderating continuously since October 24, the core inflation (CPI excluding food and fuel) has remained sticky. While it edged up from a low of 3.3 per cent in August 24, core inflation remained below 4 per cent mark till January 2025. However, since February 2025, it has exceeded 4 per cent and in the month of May it stood at 4.2 per cent — second-highest in the last 19 months.

“The imported inflation for May reached 6.3 per cent with oils and fats contributing to the build-up. Interestingly, with 36.4 per cent weight in the overall basket, the imported inflation accounts for half of the total weighted contribution 1.41 per cent in current months CPI,” it said.

Published on June 20, 2025