Retail inflation rises to 2.07% in August on uptick in food prices

New Delhi:  The annual retail inflation rose to 2.07 per cent in August from an eight-year low of 1.61 per cent recorded in the previous month driven by uptick in food prices, official data showed on Friday.

Despite the marginal increase, the Consumer Price Index (CPI) based headline inflation remains substantially lower than the Reserve Bank of India’s medium-term target of 4 per cent.

Food prices remained in the deflationary zone for the third consecutive month. However, there was an uptick of 107 basis points in food price on a month-on-month basis. In August, food inflation stood at -0.69 per cent against -1.76 per cent recorded in July. Food inflation accounts for nearly half of the CPI basket.  

The uptick in food inflation was led by the surge in tomato prices. Tomatoes became costlier by 16.9 per cent year-on-year in August.

Inflation was lower in rural areas when compared with the urban areas. Rural inflation stood at 1.69 per cent while the urban areas witnessed an inflation of 2.47 per cent during the month under review.

There was a wide regional variation in the price rise. The states like Kerala, Karnataka, Jammu & Kashmir, Punjab and Tamil Nadu recorded much higher inflation than the national average.

Retail inflation in Kerala stood at 9.04 per cent in August against the national average of 2.07 per cent. In Karnataka, retail inflation stood at 3.81%, while Tamil Nadu recorded an inflation of 2.93 per cent. However, some states like Assam and Odisha recorded negative inflation, meaning overall retail prices in these states during the month of August were lower when compared with the same month last year.

Out of 35 states and union territories (UTs), the CPI inflation in 26 States/UTs was below 4 per cent.  Only two states /UTs namely Kerala and Lakshadweep, recorded inflation above 6 per cent, the central bank’s upper tolerance limit.

The Kerala case is clearly the most interesting outlier. Rural Kerala witnessed inflation of 10.05 per cent, while inflation in urban Kerala stood at 7.19 per cent. The driving factor was the oil and fats. “In the case of Kerala the steep rise in coconut oil prices has driven the trend and local preference has dominated index momentum,” SBI Research said in a note.

According to analysts, inflation is likely to remain low in the coming months due to the cut in goods and services tax (GST) rates.

“The full impact of GST rate rationalisation will start commencing from October. We expect FY26 retail inflation to average around 3 per cent,” said Paras Jasrai, Associate Director, India Ratings and Research.

“With the GST rate cuts being implemented on September 22, 2025, the impact of the same on the CPI inflation is unlikely to be material in the ongoing month, given that the average monthly prices are used for computation of the price indices,” said Aditi Nayar, Chief Economist, ICRA.

While the low inflation trajectory is good news for the consumers, it is not so good for the government balance sheet. Impact of slower GDP growth is already visible in government finances and tax collection growth trailing FY26 budget targets.

“The demand push due to GST rate rationalisation will be key to monitor for fiscal impact,” said Jasrai.

Rajani Sinha, Chief Economist, CareEdge Ratings, said the GST rate rationalisation is likely to bring down the CPI inflation by 70-90 basis points. “With food inflation subdued and demand-side pressures contained, we now lower our inflation projection for FY26 to 2.7 per cent from 3.1 per cent earlier,” Sinha said.