It reached an all-time high of 38 percent in May 2023 (based on monthly data available since 1964) and then dropped to a historic low of just 0.3 percent in April 2025. Inflation remains highly volatile, and policymakers must tread carefully if they aim to maintain it within the medium-term target of 5–7 percent.
Low inflation isn’t necessarily a good thing. One of the main reasons behind the recent decline is the steep fall in wheat prices, which have nearly halved from their peak. This has severely hurt the farm economy and raised concerns about food security.
The impact extends across the broader economy, as reduced spending by farmers is holding back recovery in both manufacturing and services. Even the Punjab government, which has taken credit for the drop in prices, is now internally considering ways to push wheat prices back up to revive the rural economy.
Sooner or later, wheat prices are likely to rise—and other commodities may follow. This could trigger a sharp uptick in inflation, though likely not back to extreme levels. For now, food inflation is down across the board: it declined by 2.1 percent month-on-month in April and fell 4.8 percent year-on-year. Perishable items saw even sharper drops—down 26.7 percent YoY in April.
Compared to the same period last year, the biggest declines were seen in onions (-75%), tomatoes (-58.2%), wheat (-36%), and wheat flour (-34.7%). However, some food items have seen price increases over the past 12 months, such as moong pulses (29.8%), butter (24.5%), honey (21.7%), and milk powder (19.2%).
Beyond food, energy prices have also dropped significantly, driven by weak global commodity markets. The outlook remains soft due to a potential global trade slowdown following U.S. tariff hikes and increased oil production by non-OPEC+ countries. The housing and utilities index declined by 2.6 percent compared to March 2025, and 0.5 percent compared to April 2024.
The sharpest monthly fall was in electricity prices, which dropped by 15.2 percent MoM. On a year-on-year basis, electricity charges declined by 26.7 percent, while motor fuel was down by 10.7 percent.
However, despite the decline in food and energy inflation, core inflation (non-food, non-energy) remains sticky. It stood at 8 percent in April 2025—7.4 percent in urban areas and 9.0 percent in rural areas. Month-on-month, it rose by 1.2 percent, partially offsetting the relief from falling food and energy prices.
The biggest monthly increase came from the education sector, which rose by 3.7 percent MoM and 10.9 percent YoY. Health inflation increased by 0.6 percent MoM, and 14.2 percent YoY. Similar trends were observed across various miscellaneous categories.
These figures suggest that underlying wage pressures persist, and the minimum wage is likely to be raised in the upcoming budget. Inflation has likely bottomed out due to the base effect and is expected to rise. While analysts project inflation to stay below 5 percent over the next 12 months, they may be underestimating the volatility embedded in the index.
In sum, the situation calls for a cautious stance by the Monetary Policy Committee.
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