Inflation falls, but so does buying power

LAST year, around this time, I did two things. I went on a ketogenic diet to lose weight, and I started keeping a detailed daily record of my expenses. The keto diet made me switch from Nestle’s A+ toned milk to Amul Gold, which has a higher fat content. It not only made me lose weight but was also lighter on my wallet by nearly 30 per cent.

As I write this, a one-litre pack of Amul Gold costs Rs 80 in Delhi-NCR. My expense records tell me that I bought the same pack size on June 22 last year. It cost me exactly the same amount. As far as high-fat milk goes, there’s been zero inflation in the past one year.

The same day’s accounts show that I bought 1 kg of potatoes on Swiggy Instamart for Rs 39. Today, the app shows that I can buy the same quantity for Rs 34. That’s a drop of 13 per cent. That is less than the decline in the average prices of potatoes across the country. Official data shows that potatoes cost 20 per cent less in May than they did a year ago. And that is showing up in the prices of potato-based packaged snacks as well: my record shows a pack of Lay’s Magic Masala chips costs the same as it did one year ago.

Even house rents, which had shot up over the past couple of years, have started to taper off. A friend who rents a 3-BHK apartment in a tony part of Gurugram shifted to a 4-BHK flat in the same condominium early this month by paying just Rs 2,000 more. The house he is leaving now fetches Rs 5,000 less than what he was paying. Landlords, who were earlier insisting on a 10 per cent annual hike to be written into the lease agreement, are now settling for a 5-7 per cent hike.

These are clear signs that inflation is cooling off quickly. It confirms the official Consumer Price Index data. In May, overall retail prices rose by just 2.9 per cent compared to last year; food and beverages went up just 1.5 per cent; clothing and footwear by 2.7 per cent; fuel and light 2.8 per cent; soaps, shampoos, hair oil, creams and lotions, shaving cream and razor blades, were together costlier by just 3.4 per cent. The only thing that has increased by more than

5 per cent is tuition fees in schools and colleges.

So, why did prices start moderating in the past few months? There are various reasons for this.

The first reason is overproduction, which might have happened in the case of fruits and vegetables. For instance, take potatoes — their retail price rose a whopping 54 per cent in 2024-25. Since farmers respond to price signals, the decline in prices in 2023-24 led to a five per cent fall in potato output that year. The rise in prices in 2024-25 caused production to rise by 4.4 per cent. This number does not capture all of the increased output since some new potatoes arrive in the market in April, after the fiscal year ends. For instance, West Bengal, one of the largest potato growing states, is expecting a 30 per cent increase in the potato harvest this year. This caused prices to slide by 36 per cent in May, compared to December last year.

The second reason is the lack of demand. Manufacturers of fast moving consumer goods (FMCG) — from biscuits to bath gels — have been complaining about the flagging demand for their products. Hindustan Unilever saw its sales volumes grow by just 2 per cent in the first three months of 2025 compared to the same period last year and volumes in personal care products have actually declined.

So, most companies have found it difficult to pass on the increased raw material costs to consumers, fearing that a price raise might cause the demand to shrink more.

The reason for this fall in consumption demand is well known. Only the top 8-10 per cent of the Indians have the capacity for spending on goods beyond bare necessities. These are the people who buy better quality soaps, detergents, processed cheese and other products that the rest of India cannot afford. And, almost all pundits agree that this class has seen a massive squeeze in its incomes. The worst hit are white-collar workers whose incomes haven’t kept pace with inflation.

This relatively affluent group had been sustaining its expenditure for the past couple of years by eating into its savings or by borrowing. A large number of middle-class Indians, including those in smaller cities, have run up large amounts of debt by taking personal loans to finance their consumption habits. That process is now coming to an end as white-collar jobs shrink across the board. So, the only option for the middle-class now has been to cut back on spending. That, in turn, is causing the overall demand in the economy to shrink and, consequently, for the inflation rate to fall.

The Reserve Bank of India (RBI) has a mandate to maintain retail inflation within the 2-4 per cent band. In theory, this can be done by adjusting interest rates. If inflation goes up too much, the interest rate is increased to encourage people to save and spend less. It also discourages them from borrowing to fuel consumption and investment. The opposite is done when inflation falls and growth slows down. Interest rates are cut to make borrowing cheaper and to encourage consumers to spend now rather than save for the future.

With inflation falling below 3 per cent, the RBI has decided to ‘front load’ its rate cuts. The benchmark rate has been pared by one percentage point since February. The stated objective is to boost consumption and investment. The big question is whether corporates will borrow more to invest and generate more middle-class jobs or whether it will fuel a debt-led consumption bubble.

Aunindyo Chakravarty is a senior economic analyst.

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