India Sep-26 CPI Inflation spikes to 5.54% as food inflation touches 7.74%

FOOD TRIGGERS A SPIKE IN CPI INFLATION

It has not been the best of times for the Indian inflation basket. The El Nino effect has already taken food inflation and it only got worse in September 2026. Food inflation spiked from 5.97% in August to 7.74% in September, taking the headline CPI inflation higher from 4.83% to 5.54%. CPI inflation is pegged to touch 6% by end of 2026.

The Kharif output may be on par with last year, but the real pressure will be felt in the Rabi output, which is around 55% of India’s annual crop output. Delayed monsoons and low reservoir levels are likely to impact the Rabi output, and that is what the higher level of food inflation is indicating. For now, it is food that is driving headline inflation up.

Data Source: MOSPI

KEY DRIVERS OF HEADLINE INFLATION IN SEP-26

• September 2026 marks the eleventh consecutive month that the consumer inflation has been progressively higher than the previous month. For instance, consumer inflation touched a low of 0.25% in October 2025 and has been rising progressively in each month since then. In 11 months, the spike has been 529 basis points.

• Transport inflation crossed 5% during the month, largely on account of Brent Crude prices sustaining above $100/bbl. That also has a trickle-down effect on other items.

• In terms of products; Potatoes, Tomatoes, Motor Cars/Jeeps, Lady’s Finger, and Coconut reduced the pressure on inflation. However, upward pressure on inflation came from Onion, Silver Jewellery, Ginger, Garlic, and Lemon.

• Personal care, gold and silver mellowed from 15.17% to 13.75%, as the gold and silver prices fell sharply in the last few weeks on the back of hawkish Fed indications. With more rate hikes likely, we could see gold and silver prices under pressure.

The million-dollar question; what is the inflation outlook, and how will RBI react?

WHAT IS THE OUTLOOK FOR CPI INFLATION FROM HERE?

Let us look at the critical product baskets and the impact it could have in the coming months on consumer inflation.

• Let us look at food inflation. For September 2026, food inflation spiked 177 bps to 7.74%, triggered by rural food inflation at 8.06%. The IMD has pegged the final rainfall deficit for 2026 at nearly 13%, which makes it the worst since 2009. Ironically, there has also been recent shifting of foodgrain towards ethanol production.

• Crude oil has been under pressure, which has worsened after the recent Houthi attacks on King Khalid International Airport in Saudi Arabia. Clearly, peace does not look imminent in the region. Also, the US and China have substantially depleted their SPRs, and that will act as a floor for any fall in crude prices.

• The pressure of supply chain constraints is starting to show and that was evident in core inflation (ex-food and fuel), spiking from 4.16% in August to 4.60% in September. During this period, the impact of gold and silver was negative, but most of the other downstream products and services were hit by supply disruptions.

• For the last few months, the trend has been rural inflation outpacing urban inflation by a big margin (120 bps in Sep-26). If one looks at the break-up of rural and urban inflation; rural inflation is higher in case of F&B, clothing, footwear, home fuels, furnishings, transport, Recreation, Communication, and precious metals.

• Amont the other product baskets; Urban inflation is higher in case of Paan, Tobacco, and education services. In case of health and restaurants, urban and rural inflation are almost at par. Overall, rural inflation at 6.08% in September 2026 is higher than urban inflation at 4.88%. However, rural India is now showing signs of slowing down.

The big shift this month has been the perceptible contraction in tractor sales and rural offtake of FMCG products. Both are pointing to the fact that the slowdown in rural India has really hit rural incomes and rural purchasing power. How will the RBI react now?

RBI MPC has already hiked rates by 25 bps in October. However, with runaway inflation, another 25 bps may be on the cards. At 5.75%, the repo rate will be 60 bps above the pre-COVID rate. Weak rural demand may restrict the RBI from more hawkishness.