Inflation lessons, Pg8

Key Highlights:

• Retail inflation hit a 99-month low of 1.54% in September 2025.
• The average inflation rate for the first half of the fiscal year is 2.2%, within the RBI’s comfort band of 2%-6%.
• The RBI had previously targeted 4% inflation and may need to re-evaluate this target given current low inflation.
• The government has attempted to stimulate domestic demand through income-tax and GST rate reductions.

Detailed Insights:

• Consistently low inflation suggests that supply is exceeding demand, as seen in the clothing and footwear category with 2.3% inflation.
• Faced with oversupply, the government has tried to stimulate domestic demand through income-tax and GST rate reductions, but households are saving rather than increasing consumption.
• A sustained increase in real wages is needed, requiring the private sector to increase investments, which have grown in announcements but need to materialize into real projects.
• The RBI can help by cutting interest rates significantly in the next Monetary Policy Committee meeting in December.
• The RBI needs to address the inaccuracy of its inflation forecasts, which were drastically revised from 4% in April to 2.6% in late September.

Key Concepts Involved:

• Retail Inflation: The change in the price of a basket of goods and services that are typically purchased by households.
• Monetary Policy Committee (MPC): A committee that decides the policy interest rate to control inflation.
• Real Wages: Wages adjusted for inflation, reflecting the actual purchasing power of income.