India’s headline retail inflation rose to 1.33% in December 2025, up from 0.71% in November, marking a three-month high, according to official government data. The increase was primarily driven by a slowdown in the pace of food price declines, along with rising costs across select consumer categories. Despite the uptick, inflation remains significantly below the Reserve Bank of India’s medium-term target, reflecting a broadly stable price environment.
Understanding the Inflation Trend
Retail inflation in India is measured using the Consumer Price Index (CPI), which tracks price changes in a basket of essential goods and services consumed by households. The December rise indicates that while prices are still largely under control, downward momentum in food inflation is weakening.
For the eleventh consecutive month, inflation remained below the RBI’s target of 4%, reinforcing the view that price pressures in the economy are moderate. However, the upward movement suggests that inflation may be gradually bottoming out.
Role of Food Prices
Food items carry the highest weight in the CPI basket, making them the most influential factor in inflation trends. In December, the Consumer Food Price Index remained in deflation, but the contraction slowed to 2.71%, compared with 3.91% in November. This moderation in deflation was the primary reason behind the rise in overall inflation.
Vegetables, cereals, pulses, and edible oils saw mixed price movements. While some items continued to remain cheaper than last year, others began showing early signs of recovery. This shift suggests that supply conditions are stabilising and seasonal price corrections are nearing an end.
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Movement in Other Categories
Apart from food, inflationary pressures were also visible in:
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Personal care products
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Meat and fish
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Eggs and spices
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Clothing and footwear
These categories contributed marginally to the rise in headline inflation. Meanwhile, fuel and light inflation remained relatively stable, offering some relief to consumers.
Housing inflation, which largely affects urban households, continued to show steady upward movement, reflecting rising rental and maintenance costs.
Rural vs Urban Inflation
Inflation trends differed notably between rural and urban India:
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Rural inflation rose to 0.76% in December from 0.10% in November.
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Urban inflation increased to 2.03% from 1.40%.
The sharper rise in urban inflation reflects higher service costs, housing expenses, and lifestyle consumption, while rural inflation remains restrained due to better food availability and lower service price pressures.
Staying Below RBI’s Comfort Zone
Despite the rise, retail inflation remained below the RBI’s lower tolerance level of 2% for the fourth straight month. This provides policymakers with significant flexibility to maintain an accommodative stance.
The RBI’s inflation target range is 2% to 6%, with a preferred midpoint of 4%. Current inflation levels indicate that the economy is operating in a low-inflation environment, offering scope for growth-supportive monetary policies.
Implications for Monetary Policy
The December inflation data comes shortly after the RBI cut the repo rate by 25 basis points, signaling its confidence in inflation control. The continued softness in prices supports the argument for maintaining an accommodative policy stance.
However, economists are divided on the next course of action:
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Some believe the RBI should pause further rate cuts due to the visible upward movement in inflation.
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Others argue that inflation remains low enough to allow continued policy support if economic growth shows signs of slowing.
The RBI’s next monetary policy review in February 2026 will be crucial in determining whether this rising inflation trend is temporary or the beginning of a sustained recovery in prices.
Structural Factors Behind Inflation Behavior
Several structural elements influence the current inflation pattern:
Base Effect:
Inflation calculations are affected by last year’s price levels. A favourable base from the previous year has kept current inflation readings low.
Seasonal Food Supply:
Harvest cycles and storage conditions strongly affect food prices. As winter supplies stabilize, food deflation is expected to narrow further.
Global Commodity Trends:
International prices of crude oil, fertilisers, and edible oils also affect domestic inflation. Any sharp rise globally could translate into higher domestic costs.
Impact on Consumers
For households, inflation at 1.33% means purchasing power remains largely intact. While certain daily essentials have become slightly more expensive, overall cost pressures are manageable.
Low inflation also supports consumer confidence, encouraging spending on discretionary items such as travel, electronics, and housing, which in turn boosts economic activity.
Impact on Businesses
Businesses benefit from predictable input costs in a low-inflation environment. Stable pricing enables better planning, margin protection, and investment decisions. However, companies in food processing, retail, and FMCG sectors must carefully manage pricing strategies as food deflation slows.
Outlook for the Coming Months
Inflation is expected to gradually rise in early 2026 as:
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Food deflation continues to moderate
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Base effects fade
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Service sector prices remain firm
However, a sharp surge is unlikely unless there is a major supply shock or a global commodity price spike. Most economists expect inflation to remain well within the RBI’s comfort range in the near term.
An additional factor to watch is the upcoming revision of the CPI base year to 2024, which will update consumption weights and may slightly alter reported inflation trends.
Conclusion
India’s retail inflation rising to 1.33% in December reflects a natural correction after months of exceptionally low readings. While it marks a three-month high, inflation remains firmly under control and far below policy targets.
The data highlights a balanced economic environment where price stability coexists with growth potential. For policymakers, the challenge will be to maintain this balance while preparing for possible future inflationary pressures. For consumers and businesses alike, the current inflation landscape continues to offer stability, confidence, and opportunity.
