Inflation rose to 3.21% in February, but US-Israel-Iran war impact yet to be felt

India’s headline retail inflation rate rose to 3.21% in February from 2.74% in January, data released on Thursday by the Ministry of Statistics and Programme Implementation (MoSPI) showed, with prices faced by consumers rising at a faster rate even before the US and Israel attacked Iran at the end of the month and the subsequent retaliation by the West Asian nation that has seen energy prices surge given the region’s importance in the global fuel supply chain.

According to data released by the statistics ministry, the rise in inflation in February was driven by an unfavourable base effect as well as the continued rise in prices of gold (48% inflation) and silver jewellery (161%). Key food items such as tomato (45%) and cauliflower (44%) also saw a big jump in prices compared to last year, while a fall in prices of others such as onion (down 28%) and potato (down 18%) kept the rise in the headline inflation rate in check.

On the whole, food inflation rose to 3.47% from 2.13% in January. However, the food price momentum – or the month-on-month increase in food prices – was non-existent, with the Consumer Food Price Index down 0.2% in February compared to January, suggesting an unfavourable base effect helped drive up the year-on-year inflation rate. The price momentum for all the items in the Consumer Price Index (CPI) as a whole was minor, with the index up 0.1% from January.

“…the tobacco and intoxicants category also witnessed an uptick in inflation, driven by a sharp increase in excise duty on tobacco products. Meanwhile, core inflation remained stable at 3.4%, unchanged from the previous month. Excluding precious metals, core inflation stood significantly lower at 2.0%, indicating broadly contained underlying price pressures,” Rajani Sinha, Chief Economist at CareEdge Ratings, said.

The CPI data for February is the second inflation print under the updated inflation series which has a base year of 2024 for prices and updated consumption basket based on the 2023-24 Household Consumption Expenditure Survey. Released last month, the new CPI inflation series has a lower weight of food and includes more goods and services than before, thus providing a more comprehensive and updated picture of the country’s price situation.

If one counts the numbers as per the old CPI series, the February inflation rate of 3.21% is the highest in 11 months. However, one-to-one comparisons between inflation numbers between the old and new series are not appropriate. Further, even at 3.21%, CPI inflation remains under the Reserve Bank of India’s (RBI) medium-term target of 4% for the 13th month in a row, although the figure for February is likely irrelevant for the central bank given the global developments of March and how they have impacted prices.

“February does not consider the war effect and hence March inflation would reflect the initial impact in terms of higher fuel prices especially of LPG. We could expect March inflation to be in the same range of 3.2-3.5% based on observations in the market so far in the food domain,” said Madan Sabnavis, Bank of Baroda’s Chief Economist.

While global crude oil prices surged to $120 per barrel earlier in the month following US and Israel’s attack on Iran and its subsequent retaliation that involved shutting down the crucial waterway of the Strait of Hormuz, prices have eased somewhat but remain highly volatile even after the International Energy Agency on Wednesday said it will release 400 million barrels of oil – the largest in its history – to cool oil prices.

The jump in global energy prices as well as shortages have already had a severe impact on India, with the government forced to take measures to prioritise certain sectors over others. The price of household cooking gas has been raised by Rs 60 per cylinder and the minimum waiting period for booking these cylinders for refills has been increased to 25 days from 21.

Data for February, however, showed no impact of the war on Indian households’ domestic fuel affordability, with inflation for the ‘electricity, gas and other fuels’ category of the CPI standing at 0.14% in February. The index for the category was down 0.2% compared to January. However, this should change when data for March is published on April 13.

In terms of interest rates, the RBI’s Monetary Policy Committee (MPC) is widely expected to keep the policy repo rate unchanged at 5.25% when it meets early next month. The committee, which reduced the repo rate by 125 basis points (bps) since the start of 2025, will want to take stock of the evolving global situation and its impact on domestic inflation and the rupee’s exchange rate. Rapid weakening of the rupee – which closed at 92.2 per US dollar on Thursday after – can lead to what is called ‘imported inflation’, in which the prices paid by Indian importers of foreign goods rises because the rupee is worth less in terms of the foreign currency than before.

The MPC is scheduled to meet from April 6-8.

Siddharth Upasani is a Deputy Associate Editor with The Indian Express. He reports primarily on data and the economy, looking for trends and changes in the former which paint a picture of the latter. Before The Indian Express, he worked at Moneycontrol and financial newswire Informist (previously called Cogencis). Outside of work, sports, fantasy football, and graphic novels keep him busy. ... Read More