India Jun-26 CPI Inflation spikes to 4.38% on supply chain constraints

HIGHER INFLATION – WAR IS OVER; NO IT IS NOT

The vagaries of consumer inflation in India are moving almost in tandem with changing tempers in the Middle East. Brent Crude had dipped to $71/bbl in the first week of July on hopes that the US-Iran truce will finally come to fruition. However, war mongering started almost immediately and the fragile peace process broke up in no time. Brent Crude has rallied back to $85/bbl, and any hopes of lower inflation in the coming months is ruled out. Also, with the El Nino effect still quite strong, there are strong expectations in the market that the overall rainfall deficit in 2026 will trigger a surge in food inflation.

Data Source: MOSPI

KEY DRIVERS OF HEADLINE INFLATION IN JUN-26

• Over the last 3 months; Food inflation has gone up from 3.87% to 5.32%. While the El Nino will hit the Kharif output, bigger concerns are on the reservoir level impact.

• Transport inflation, an outcome of fuel prices, has surged from 0.00% to 4.31% in last 3 months. Transport has strong externalities, with a very resounding lag effect.

• In terms of products; Potatoes, Peas, Motor Cars, Cumin-Seeds, and 2-wheelers curtailed inflation. Pressure came from Silver, Ginger, Gold, Tomatoes, and Raisins.

• Personal care, gold and silver is not only pushing up core inflation but also headline inflation. Despite the fall in global prices, weak rupee is keeping local prices robust.

WHAT IS THE OUTLOOK FOR CPI INFLATION FROM HERE?

Let us look at the impact of 4 critical baskets and the impact that it could have in the coming months on consumer inflation.

• Let us look at food inflation, with the food basket spiking to 5.32% in June 2026. While the weightage of food in the inflation basket has reduced, it still remains the single largest item influencing CPI inflation. El Nino effect will be the big overhang.

• Crude oil has been incredibly volatile, in tandem with the changing fortunes of the Middle East. This month, it is back to war with the peace accord as good as dumped. Brent fell to $71/bbl, but has bounced back to $85/bbl in the last 1 week.

• Core inflation has again increased in June (amid supply chain constraints) and is now closer to 4%. The impact of supply chain constraints are starting to show on core inflation. WPI inflation at 9.87% also shows the price impact on industry.

• If one looks at the break-up of rural and urban inflation; then rural inflation is higher in case of F&B, clothing, footwear, home fuels, home furnishings, transport, Communication, Recreation, and gold & silver. In other baskets, urban inflation leads. Overall, rural inflation at 4.74% in June 2026 is higher than urban inflation by 82 bps.

The recent oil price spike has taken away RBI’s comfort zone on rates. They need to decide quickly on rate hikes to curtail inflation. RBI can skip rate hike in August under the pretext of FCNR(B) inflows; and its mitigating impact on imported inflation. RBI is pegging core inflation for FY27 at 4.7%. A rate call is inevitable in the Oct-26 MPC meet.