India’s CPI inflation rose further to 3.93% YoY in May-26, from 3.48% in Apr-26 broadly in line with market expectations (Reuters median consensus estimate of 4.0%). This marked inflation at a 16-month high, edging close to the RBI’s 4.0% target.

Key highlights of May-26 data

• The sequential momentum posted at a 10-month high of 0.75%, above the series median increase of 0.61% MoM associated with May. 
• Annualised Food & Beverages inflation rose to 4.5% in May-26 from 4.0% in Apr-26. 
  1. The build-up in sequential momentum was broad-based, led by Vegetables & Pulses (2.5%), Ready-made food products (1.5%), Meat (1.1%), Milk, other dairy products & Eggs (1.0%), Fish & other seafood (0.9%) and Oils & fats (0.8%) among others.
  2. At an item-wise level, prices of Tomato, Ginger, Litchi, Peas, Cauliflower, Radish, Cabbage, and Carrot recorded double-digit sequential price gains. This was partly offset by double-digit sequential decline in Mango, Lady’s Finger, Parwal, Muskmelon, and Watermelon.
• Consolidated fuel inflation surged sizably by 150 bps in May-26 to 1.9% YoY in May-26. Sequentially, price momentum was the strongest on record at +1.6%, led by petrol (3.1%) and diesel (3.3%).
• Core CPI inflation (represented by the CPI excluding indices of Food & Beverages, Electricity, gas and other fuels, and petrol, diesel & other fuels items within the Transport division) rose by 20 bps to 3.9% YoY in May-26, after remaining nearly unchanged for four months in a row. 
• Core-Core CPI inflation (excluding gold, silver, diamond, platinum jewellery & other items from Core CPI) saw an uptick by 20 bps to 2.4% YoY in May-26.

Inference and Outlook

While the May-26 headline inflation print appears comfortable, granular details suggest an upward bias in several inflation sub-categories. Strains in energy markets are now beginning to reflect more directly in CPI inflation. 

• A part of the upside to headline inflation was on account of Food.
• Given India’s import dependence and higher international prices (IMF international edible oil index +20% YoY), Oils & Fats added a sizable ~29 bps to the headline inflation print in May‑26. 
• Rise in milk prices by leading national brands by Rs 2/litre in mid-May-26 provided sequential upside to dairy inflation.
• Vegetable prices saw strong gains, led by tomatoes, exacerbated by the ongoing heatwave, and higher transportation costs.
• Owing to a cumulative ~79% increase in commercial LPG prices between Mar-May-26, inflation for Food & beverage serving restaurants rose to 5.8%
• Ending a four-year freeze, the hike in retail diesel and petrol prices since 14th May-26 translated into a direct addition of 15 bps to headline CPI for May-26
• Meanwhile, rise in ATF prices by ~25% reflected in further escalation in domestic airfares by 15%YoY, up from 11% in Apr-26. 

Looking ahead, food inflation trajectory could face material upside from a below-normal monsoon outlook and the broader energy crisis that continues to linger for the 4^th consecutive month.

• The IMD has further downgraded its south-west monsoon forecast, with cumulative rainfall now estimated at 90% of LPA (from 92% earlier) amid the expected onset of El-Nino from Jun-26 onwards. The anticipated deficiency in rainfall in the latter half of the season, implies kharif crop sowing/yields and subsequent rabi sowing later in the year could come under significant pressure. 
• Any potential fertilizer supply shortages against a backdrop of elevated global fertilizer prices (IMF fertilizer index +31% YoY during Mar-May-26), even as current stocks remain enough to cover ~50% of kharif season’s requirement, could add further downside to Kharif output (and upside to prices). 

On the war front, the respite offered by the fragile ceasefire has proved fleeting, giving way to renewed phases of escalation. With the Strait of Hormuz continuing to be functionally inoperable, fears of protracted energy supply disruption remain alive. A few of the pressure points that remain on watch are -

• The remainder of the increase in retail diesel and petrol prices effected in May-26, will get reflected in Jun-26. These recent adjustments notwithstanding, there still remains an under-recovery to the tune of Rs 6 on petrol and Rs 30 on diesel being borne by OMCs on per litre sale. Having said, a decline in global crude oil price in Jun-26 to below USD 100 pb and the recent encouraging developments on US-Iran deal, may obviate the need of large incremental hikes.
• The latest round of LPG price hikes in Jun-26 is expected to exert upward pressure on inflation via both direct and indirect channels. Under-recovery on sale of every domestic LPG cylinder still remains close to Rs 700.
• Broader input cost pressures remain elevated, with international price of energy transition metals (+46%YoY) and industrial metals (+28%YoY) lifting the IMF’s primary commodity index to a 45-month high in May-26. 
• The recent ~5% INR depreciation over Mar-May-26 is likely to amplify imported inflationary costs.

Keeping in mind the above risks on food and fuel front, and the possible spillover to core inflation with a lag, we forecast CPI inflation to average at 5.5% in FY27 basis assumption of Brent crude averaging at around USD 95 pb, and a 10% shortfall in monsoon rainfall relative to the LPA. 

Table 1: Overview of key sub-components of inflation

Note:

1) CPI-Consolidated Fuel index includes the group Electricity, gas and other fuels under the Household, water, electricity & other fuels division, and Diesel, Petrol and natural gas (CNG) items from the Transport division.

2) CPI-Core excludes Food & Beverages and Consolidated Fuel indices from Headline CPI.

3) Readings under the memo items are derived from imputed indices. Figures have been rounded off.

Chart 1: CPI inflation has continued to drift upwards continuously since Oct-25, just a tad shy of 4.0% as of May-26