India’s Inflation Puzzle: August Sees Food Prices Fall But Overall CPI Inches Up

India’s inflation story took an unexpected turn in August 2025, as consumer price-based food inflation dipped into negative territory at -0.69% year-on-year, while overall consumer price index (CPI) inflation rose modestly to 2.07% year-on-year. This divergence between food and headline inflation has sparked renewed interest among economists, policymakers, and market watchers, as it reflects a complex interplay of seasonal trends, supply dynamics, and macroeconomic shifts.

 

The latest data from the Ministry of Statistics and Programme Implementation reveals a mixed picture—while food prices eased, core inflation and select commodity categories saw upward pressure. This nuanced inflation landscape is likely to influence monetary policy decisions and household spending patterns in the months ahead.

 

Key Takeaways From The August Inflation Print

- Food inflation dropped to -0.69% year-on-year, marking a third consecutive month of deflation

- Overall CPI inflation rose to 2.07% year-on-year, up from 1.55% in July

- Vegetable prices, pulses, and cereals contributed to the food inflation decline

- Core inflation, excluding food and fuel, showed a mild uptick due to gold and services

- Retail thali costs declined 7–8% year-on-year, reflecting lower input prices

 

What’s Driving The Food Deflation

The sharp drop in food inflation is largely attributed to improved agricultural output and favorable monsoon conditions. According to Crisil’s Roti Rice Rate report, the cost of vegetarian and non-vegetarian thalis fell significantly in August:

 

- Onion prices declined 37% year-on-year due to a bumper harvest

- Potato prices dropped 31% following improved production

- Pulses saw a 14% decline, supported by higher stock levels

- Broiler chicken prices fell 10%, easing non-vegetarian meal costs

 

Despite a month-on-month rise in thali prices due to festive demand and LPG price hikes, the overall year-on-year moderation remains intact. This trend has provided relief to consumers, especially in rural areas where food expenses form a major part of household budgets.

 

Why Headline Inflation Is Still Rising

While food prices cooled, other components of the CPI basket exerted upward pressure:

 

- Gold prices surged, influencing core inflation

- Edible oil prices rose 24% year-on-year due to festive demand

- LPG cylinder prices increased 6%, adding to household costs

- Services inflation remained sticky, particularly in healthcare and education

 

These factors contributed to the rise in headline CPI to 2.07%, although it remains well below the Reserve Bank of India’s target of 4%. Economists note that the fading base effect from last year’s low inflation readings also played a role in the uptick.

 

Implications For Monetary Policy And Markets

The Reserve Bank of India is likely to view the August inflation data as a sign of stability rather than concern. With CPI still below target and food inflation in negative territory, the central bank may continue its accommodative stance. However, rising core inflation and global uncertainties could temper expectations of aggressive rate cuts.

Bond markets responded positively, with yields on the 10-year benchmark government bond dipping to 6.45%–6.49% amid expectations of continued policy support. Overnight index swaps also saw receiving interest, reflecting a benign inflation outlook.

 

Looking Ahead: What To Watch In Q4

As India enters the festive season, inflation dynamics may shift:

 

- Demand for food and consumer goods is expected to rise

- Weather disruptions could impact vegetable and fruit prices

- GST rate rationalization may lower inflation and boost disposable income

- Global commodity trends and currency movements will influence import costs

 

Economists forecast that CPI inflation may hover around 2.5%–3% in the coming months, with food inflation gradually normalizing as supply-demand balances adjust.

 

Conclusion: A Tale Of Two Trends

India’s August inflation data underscores the complexity of economic signals. While falling food prices offer relief to consumers, the rise in overall CPI highlights underlying pressures that cannot be ignored. For policymakers, the challenge lies in balancing growth, affordability, and fiscal prudence as the economy navigates a post-pandemic recovery.

 

Sources: The Hindu BusinessLine, MSN Money, BusinessWorld, Ministry of Statistics and Programme Implementation, Crisil Intelligence RRR Report