Disinflation

Topic: Inflation and Index Numbers: CPI, WPI, IIP and the Deflator · NCERT: Beyond NCERT

Meaning

Disinflation means the rate of inflation is falling but is still above zero. Prices keep rising, only more slowly than before (for example, from 6% a year to 4% a year).

It matters because the headline number coming down does not mean things have become cheaper. The price level is still going up. The RBI has to judge whether the fall is real, or whether it is only a result of how the rate is calculated.

Inflation is measured year-on-year (y-o-y):

Inflation rate (%) = (Iₜ − Iₜ₋₁₂) / Iₜ₋₁₂ × 100 [1]

Here Iₜ is the price index for this month and Iₜ₋₁₂ is the index for the same month last year. Disinflation happens when this rate goes down over time but does not go below zero.

Explanation

How disinflation works

• Inflation means the general price level (the prices of most goods and services) keeps rising over time.
• Disinflation is about the speed of that rise. The speed falls, but prices still move up.
• Worked example (from the notes):
• Year 1: the price index goes from 100 to 106, so inflation is 6%.
• Year 2: inflation slows to 4%, so the index goes from 106 to about 110.2 (106 × 1.04).
• The rate fell from 6% to 4%. That is disinflation.

• The price level still went up, from 106 to 110.2. Prices did not fall.

• Purchasing power (how much one rupee can buy) still falls during disinflation. It just falls more slowly than before.

Real disinflation vs "statistical" disinflation

The y-o-y rate depends on two things: today's prices, and the prices of a year ago (the base). So a falling rate can come from two different sources.

• Base effect: the index level of a year ago can change this year's rate by itself.
• High base. Last year saw a price spike, so the denominator Iₜ₋₁₂ is large and this year's rate looks small.

• Result: inflation falls on paper even though prices are still rising now.

• Momentum: the month-on-month (m-o-m) price change this month. It shows the price pressure right now [3].

• The RBI method: change in y-o-y inflation ≈ momentum now − momentum in the same month last year (the base effect) [3].
• Worked example (disinflation from a high base):
• Index: June 2024 = 100, July 2024 = 104 (a one-month spike of +4%). June 2025 = 105, July 2025 = 105.5.
• June 2025 inflation = 5%.
• July 2025 inflation = (105.5 − 104)/104 × 100 ≈ 1.44%.
• Momentum in July 2025 is +0.48%, and the +4% base drops out. So 0.48 − 4 ≈ −3.5 points.
• Inflation fell from 5% to about 1.4%, so this is disinflation. But prices still rose in July 2025. Most of the fall came from the base.

What causes disinflation

• Tighter monetary policy:
• The RBI raises the repo rate (the interest rate at which the RBI lends money to banks for a short time).
• Bank loans become costlier, so people and firms borrow and spend less.

• Demand cools, and prices rise more slowly.

• Less demand-pull pressure: total demand comes closer to what the economy can produce. For example, the government borrows less or creates less money (deficit financing) to pay for its spending.

• Lower cost-push pressure: fuel, raw materials or wages become cheaper, so firms raise their prices less.
• Better food supply: a good monsoon or a large harvest brings food prices down. Food has a large weight in CPI, so this pulls headline inflation down quickly.
• Favourable base effect: a spike in the same month last year makes this year's rate look lower (see above).

In India

• Who measures it:
• CPI (Consumer Price Index: the retail prices households pay) is published every month by MoSPI (Ministry of Statistics and Programme Implementation). The new CPI series has base 2024 = 100. It was first released on 12 February 2026, starting with January 2026 data [1][2].

• WPI (Wholesale Price Index: prices in bulk trade) is published every month by the Office of the Economic Adviser, DPIIT.

• The benchmark:

• Under Section 45ZA of the RBI Act, the Central Government, in consultation with the RBI, sets a CPI inflation target once every five years [7].
• The target notified on 5 August 2016 was 4% CPI, with an upper tolerance of 6% and a lower tolerance of 2% [7].
• That target was kept for the next five years, up to March 2026.

• So in India, disinflation is usually judged by whether CPI is moving back towards 4%.

• RBI reads disinflation with care:

• In September 2024, inflation rose again after two months below target. The RBI said an adverse statistical base effect was made worse by a fresh rise in food price momentum [4].

• The lesson: a fall that comes mainly from the base can reverse once the base changes.

• Food drives most disinflation episodes:

• The Food and Beverages weight in CPI (Combined) was 45.86% in the CPI 2012 series. It is 36.75% in the CPI 2024 series (COICOP structure) [1].

• Latest figure: CFPI (Consumer Food Price Index) food inflation was 2.13% in January 2026 (provisional; rural 1.96%, urban 2.44%) [2].

• Supply-side tools that support disinflation in food:

• Operation Greens for TOP (tomato, onion, potato) is run by the Ministry of Food Processing Industries (MoFPI). It was announced in the Union Budget 2018-19 with ₹500 crore [5].
• The MIEWS portal tracks TOP prices and sends early price alerts [6].

Don't confuse with

• Deflation: the general price level itself falls and the inflation rate is negative (for example, an index going from 100 to 98 = −2%). In disinflation the rate is still positive (6% → 4%).
• Reflation: a deliberate policy (rate cuts, more liquidity, more government spending) to push inflation and output back to normal after deflation or very low inflation. Disinflation is an outcome, not a policy.
• Base effect: a cause that can produce disinflation on paper. The base effect is a statistical reason. Disinflation is the result, whatever the reason.
• Creeping inflation: a slow and steady level of inflation, below about 3% a year. Disinflation describes a direction: the rate is falling, whatever level it starts from.

Prelims Hooks

• Disinflation means a falling but still positive inflation rate. A fall from 6% to 4% is disinflation, not deflation, and prices are still rising.
• Only a negative inflation rate is deflation. "Falling inflation = falling prices" is the classic trap.
• The y-o-y CPI inflation formula used by MoSPI is (Iₜ − Iₜ₋₁₂)/Iₜ₋₁₂ × 100 [1].
• A high base (a price spike last year) can create disinflation this year even while prices rise now. A low base does the opposite.
• In the RBI's split, momentum is this month's m-o-m change and the base effect is the m-o-m change in the same month last year [3].
• The CPI target is 4% (band 2–6%). It is set by the Central Government in consultation with RBI under Section 45ZA, RBI Act, and was first notified on 5 August 2016 [7].

Mains Points

• Real or statistical disinflation?
• A sharp fall in headline CPI can come mostly from a favourable base effect, while momentum stays positive.
• If the RBI cuts rates too early on such a fall, inflation can come back when the base turns adverse, as it did in September 2024 [4].

• Reading momentum separately protects the credibility of the 4% (±2%) target.

• Supply-led disinflation and the limits of the repo rate:

• Much of India's disinflation comes from food: a good monsoon, better supply of TOP crops, or a lower food weight in CPI (45.86% → 36.75%) [1].

• The repo rate cannot fix supply shocks. Lasting disinflation in food needs storage, cold chains, Operation Greens and MIEWS alerts [5][6].

• How far should disinflation go?

• Disinflation is welcome when inflation is above target. If it goes too far, though, it can turn into deflation.
• Deflation raises the real burden of debt, makes people put off spending, and can start a deflationary spiral.
• This is why the framework has a lower tolerance of 2% as well as an upper one [7]. The goal is moderate, stable inflation, not zero inflation.

Related concepts

• Inflation
• Inflation rate
• Base effect
• Food inflation
• Creeping inflation
• Galloping inflation
• Hyperinflation
• Deflation
• Reflation
• Skewflation

Read more

• Measuring inflation: rate, base effect and the vocabulary of price change