Behind the dip: Unpacking June's low inflation print, in 5 charts

India’s retail inflation eased for the eighth consecutive month in June—the longest such streak since at least January 2014. This would offer some relief to the Reserve Bank of India, which until last fiscal year had struggled to keep inflation anchored near its medium-term target of 4.0% for six years. Mint unpacks the key trends behind the latest inflation data. 1. Food’s mood India’s headline retail inflation is heavily influenced by food prices, which account for nearly 40% of the Consumer Price Index (CPI) basket. A sustained drop in food inflation has been the main driver of the overall decline in inflation over the past eight months. Food inflation, which was as high as 10.87% in October 2023, began to ease from November and slipped into deflation in June, helping drag headline inflation down further. In June, food prices recorded a deflation of 1.06%, pushing headline CPI inflation to 2.10%, down from 2.82% in May. This marked the first instance of food deflation since January 2019. The sharp drop was led by steep deflation in key categories: vegetables (-19%), pulses (-11.76%), spices (-3.03%), and egg, meat and fish (-1.25%). Inflation in cereals and dairy products also eased compared to May. 2. Base benefit While the decline in food inflation has played a major role in pulling down the headline number, the fall doesn’t necessarily mean prices are dropping across the board. A large part of the easing is due to a favourable statistical base, even as actual prices have risen sequentially. The month-on-month trend shows that overall CPI increased 0.62% in June from May, the sharpest rise in eight months. The food index rose 1.08% month-on-month in June, marking the first rise in eight months. Within that, vegetable prices surged 7.18% month-on-month. This shows that prices have steadily risen since last month, and at a steeper rate for vegetables. However, inflation still declined: this is where the base effect kicked in. Even though prices trended higher in June from May, the pace of rise was significantly lower than June last year. This trend is likely to continue until October, keeping inflation lower. 3. Bottoming out? Price pressures appear to be building in July as well. Of the 22 food items tracked by the government for detailed retail price data, many have recorded higher average prices until 14 July compared to June. Tomatoes, for instance, rose 25.69% month-on-month in July, after a 36.06% increase in June. Wheat, flour, edible oils, loose tea, and onions also saw sequential price increases in July after falling in June. But while consumers may feel the pinch, the impact on headline inflation may be limited, as the price increases remain moderate in many cases and are still significantly lower than last July in items such as potatoes, onions, and tomatoes. Economists expect CPI inflation to moderate further in July to a range of 1.7%-1.9%. However, some believe this could mark the bottom, as rising prices may soon offset the favourable base effect. 4. Not broad-based The headline figure may offer respite to policymakers, but the decline in inflation was not broad-based, particularly in June. Over 60% of items in the inflation basket for which data were available recorded higher inflation than the headline print. It is known that core inflation, which excludes food and fuel and accounts for about 54% of the inflation basket, has been above headline inflation since February of this year. However, this was not limited to just core items like gold, silver, health and education but also included many food items like fruits, rice and packaged products. These items accounted for about 76% weightage in the inflation basket. More worryingly, 54 items out of 291 recorded over 6% inflation in June, accounting for 10% of the basket. Once the base effect fades, the downward pull of food, particularly vegetables, will stop. “We expect India's headline-core inflation gap to narrow as base effects fade in October-December and headline CPI to catch up with core inflation," said ANZ Research in a report. 5. Trend bias? Inflation data in recent months has consistently come in lower than expected, surprising both economists and the central bank. This marks a reversal from previous years, when inflation frequently overshot projections. In the first quarter of FY26, inflation averaged 2.69%, 20 basis points below the RBI’s own projection for the period. An analysis by QuantEco shows that inflation surprises tend to correlate with trend momentum: inflation data generally undershoots expectations during periods of decline, and overshoots when rising. In recent months, the consistent downward surprise has prompted economists to estimate whether the year would end with inflation undershooting the RBI’s full-year projection of 3.7%. Rating agency Icra Ltd projects inflation at 3.4%, while Barclays expects 3.5%. The central bank is widely expected to revise its full-year projection downward in its August policy meeting—though views remain divided on the likelihood of a rate cut.