Inflation, core inflation, and the worries the numbers present

In a fast-growing, developing economy like India, where inflation in the high single digits was once common, these low figures offer a mix of relief and concern. While slowing inflation is often seen as good news, some experts are starting to ask: Is this really a sign of economic health, or are there deeper problems being overlooked?

What’s behind the drop?

The data shows a clear trend — overall inflation is slowing down. The CPI inflation rate in March 2025 fell to 3.34 per cent, down from 3.61 per cent in February.

Food prices, which heavily influence inflation in India, dropped even more sharply, from 3.75 per cent in February to 2.69 per cent in March.

Inflation based on the Wholesale Price Index (WPI), which measures price changes at the wholesale level, also eased to 2.45 per cent in February, 2.05 per cent in March and 0.85 per cent in April.

Also read: WPI inflation falls to 0.85 pc in April: Govt data

Analysts Upasna Bhardwaj and Suvodeep Rakshit from Kotak Securities attributed this moderation to falling prices in key food categories such as vegetables, cereals, pulses, and eggs.

“Food inflation dipped to 1.8 per cent, led by a sharp decline in the prices of vegetables, cereals, pulses and eggs,” they said in a note. Both stable and more volatile categories of food prices remained low at 2.3 per cent and 1.8 per cent, respectively, they added.

Rural, urban inflation

Inflation in rural areas has cooled down, and urban areas are showing steady prices too, suggesting the trend is widespread.

Devarsh Vakil, head of Prime Research at HDFC Securities, pointed to other contributing factors. “With crude oil prices sharply easing, domestic demand softer, and food prices contained, we expect the Reserve Bank of India (RBI) to cut rates aggressively,” he said

Lower global commodity prices and subdued domestic demand have created a rare situation — one where inflation is not only under control but actually sits well below the RBI’s 4 per cent target.

The sticky part

But the picture gets more complicated when we look at core inflation, which excludes food and fuel prices, which tend to be highly volatile. This measure gives a clearer sense of long-term price trends.

Also read: India’s middle-class falling into debt trap: Saurabh Mukherjea

While headline inflation (the overall CPI) has dropped, core inflation remains stubborn. In April, core inflation held at 4.1 per cent, and is expected to average 4.4 per cent in the financial year 2026, up from 3.5 per cent in the previous year, according to Kotak’s estimates.

The picture gets more complicated when we look at core inflation, which excludes food and fuel prices — these tend to be highly volatile.

What’s keeping core inflation high? Mainly rising costs in personal care and related products, especially gold and cosmetics. For example, gold prices surged by 6.2 per cent in April compared to March.

So, while food prices are easing, the prices of other essentials and lifestyle items, such as healthcare, education, and personal items, are climbing. This reflects both domestic consumer behaviour and global price trends, especially in commodities like gold.

Global cues

International developments are also contributing to the decline in overall inflation.

A pause in the US-China trade conflict, lower global commodity prices, and a generally stronger global economy have all helped keep inflation in check, according to Vakil. He also believes that the RBI is likely to respond with interest rate cuts, which would make borrowing cheaper and potentially support growth.

Bhardwaj and Rakshit too agreed that the current conditions are favourable: good crop production, timely monsoons, and low prices of crude oil and other raw materials are helping. But they also warned that “the core inflation trajectory is expected to trend higher given adverse base effects and the likely continuation of the uptrend in bullion prices.”

Gold price

In simpler terms, even if inflation looks low now, it may rise again due to past trends and global factors, especially, if gold prices continue to climb. Their expectation? A bigger-than-expected interest rate cut from the RBI, about 75 to 100 basis points (or 0.75 per cent to 1 per cent) by the end of FY2026.

A Nippon India Mutual Fund report added more context, highlighting healthy economic indicators such as record Goods and Services Tax (GST) collections, stronger output in key industries, and rising loan growth. All of these factors suggest that the economy has momentum.

Also read: RBI cuts repo rate again: Signal for growth amid global headwinds

Still, experts caution that global trade shifts and market volatility could bring uncertainty in the near future.

Purchase power

In a country like India, very low inflation isn’t automatically a good thing.

It helps protect the purchasing power of consumers and gives the central bank space to lower interest rates, which can boost growth. However, it can also be a warning sign, indicating that people aren't spending, businesses aren’t investing, and overall demand is weak.

Kotak’s analysts Bhardwaj and Rakshit flagged this dilemma. “While inflation remains benign, growth prospects remain muted amid increasing uncertainties,” they wrote.

Many short-term indicators still suggest sluggish growth. For example, earnings reports for fourth quarter of FY2025 show weak corporate profits, tight margins, and limited loan growth at banks. Even large consumer goods companies are cautious about demand in cities.

What lies ahead?

Looking ahead, most analysts expect inflation to stay below the RBI’s 4 per cent target for a while.

Also read: Why declining inflation augurs well for India’s economic growth

Kotak Securities has revised its estimate for FY2026 down to 3.5 per cent, though core inflation is expected to stay higher at 4.4 per cent. This gives the RBI room to cut interest rates further, which could help support economic activity.

But the risks remain. The Nippon India report pointed to global trade tensions and market uncertainty as key issues to monitor. Meanwhile, the fact that core inflation remains elevated means that some price pressures haven’t gone away.