May inflation stays below RBI target

REtail rising prices increased for the 7th sequentially month to 3.9% in May and reached its highest rase since jan 2025, but stayed below RBI’s target of 4%. The numbers however could have been higher, except for a statistical quirk in the methodology for collecting petrol-diesel-LPG price data which treats the 15th of the corresponding month as the benchmark.Consumer Price Index (CPI) grew at 3.93% in May 2026, marginally lower than a Bloomberg economist poll prediction of 4.02%. Core inflation, which measures the non-food non-fuel part of the CPI basket and is considered more immune to seasonal fluctuations, expanded 3.7% in May, up from its 3.4% print in April. Food and beverages part of the CPI basket grew at 4.6% in May compared to 4% in April. Part of the higher growth in food inflation is on account of an adverse base effect. While the new CPI series does not give disaggregated readings before January 2026, food inflation in the old series was 1% in May 2025 and slipped into contraction territory between July-December 2025. RBI’s Monetary Policy Committee expects CPI to grow at 4.2% in the quarter ending June and 5.1% in the fiscal year 2026-27.To be sure, the inflation seen in official data and that being felt in the economy right now could be different, with the latter being higher than the former. This is because of a statistical quirk in how the National Statistics Office (NSO) collects data for three items that are critical to inflation right now: petrol, diesel and LPG. NSO’s cut-off data for collecting price point for petrol, diesel, and LPG is 15th of the corresponding month. The hike in petrol-diesel prices due to the West Asia war last month meant that the retail price of petrol and diesel on May 31 was 6.9%-7.8% and 7.7%-8.7% higher across four metro cities than last year. However, retail inflation for the two fuels in May as measured by the Consumer Price Index (CPI) came in only at 3.1% and 3.4% respectively, according to data released Friday by the statistics ministry. The four metro cities had seen only 2.8%-3.2% inflation in petrol and 3.1%-3.5% inflation in diesel by May 15. Unless prices are reduced, the inflation tailwinds from fuel price hikes will only be delayed until next month.While the CPI might have failed to capture the pump price hike, it appears to be capturing a different second-order effect of the West Asia crisis. Restaurant and accommodation services—which has a 3.3% weight in the CPI – is one of the divisions seeing a quick uptick in inflation. Inflation in this division was between 2.7%-2.8% from January to March, but inched up to 4.2% in April and 5.8% in May. All of the restaurant and accommodation inflation is due to cooked meals and cooked snacks and none of it is due to accommodation services, where May inflation was only 1.8%. Cooked meals inflation was 3.1%-3.2% in January-March, which increased to 4.3% to 5.6% in April and May, likely because restaurants are now passing on the LPG price hike to consumers. Similarly, cooked snacks’ inflation was 2.5%-2.8% in January-March, which increased to 4.2% and 5.9% in the April and May.“May CPI inflation rose to 3.9% y/y as expected, led by food and transportation. We revise up our FY27 CPI inflation forecast by 50bp to 5.0% y/y. We expect the MPC to look through the supply-shock-driven increase in inflation and keep rates on hold in CY26”, Aastha Gudwani, Chief India economist Barclays, said in a note.