Prices and Inflation: Understanding the Dynamics | Economic Survey & Government Reports - UPSC PDF Download

 Page 1


117
PRICES AND INFLATION: 
UNDERSTANDING THE 
DYNAMICS 
In gauging the health of the global economy, understanding the trends in 
inflation is essential. While global inflation peaked in 2022 due to supply chain 
disruptions and geopolitical tensions, it has declined since then, aided by policy 
measures. In India, retail inflation eased in FY25 due to timely interventions by 
the government and the Reserve Bank of India. Core inflation reached its lowest 
point in a decade, while food inflation was affected by supply chain disruptions 
and adverse weather conditions.
Onion and tomato prices are affected by the decline in production, partly due 
to extreme weather conditions and monsoon-induced supply chain disruptions. 
On pulses, despite being a major producer, India faces a gap in demand and 
supply. The government has undertaken several measures to rein in the prices 
of vegetables like onion and tomato which included procurement and buffer 
stocking of onion under price stabilisation fund and subsidised sale of onion and 
tomato. Also, many administrative measures have been taken-up to address the 
price pressures in pulses such as subsidised retail sale, stock limits and easing 
imports.
Estimates suggest that India's retail price inflation will align progressively with 
the target. Global commodity prices are expected to decline, potentially easing 
core and food inflation. Long-term price stability could be achieved by robust 
data systems for monitoring prices, developing climate-resilient crops, reducing 
crop damage and post-harvest losses.
Page 2


117
PRICES AND INFLATION: 
UNDERSTANDING THE 
DYNAMICS 
In gauging the health of the global economy, understanding the trends in 
inflation is essential. While global inflation peaked in 2022 due to supply chain 
disruptions and geopolitical tensions, it has declined since then, aided by policy 
measures. In India, retail inflation eased in FY25 due to timely interventions by 
the government and the Reserve Bank of India. Core inflation reached its lowest 
point in a decade, while food inflation was affected by supply chain disruptions 
and adverse weather conditions.
Onion and tomato prices are affected by the decline in production, partly due 
to extreme weather conditions and monsoon-induced supply chain disruptions. 
On pulses, despite being a major producer, India faces a gap in demand and 
supply. The government has undertaken several measures to rein in the prices 
of vegetables like onion and tomato which included procurement and buffer 
stocking of onion under price stabilisation fund and subsidised sale of onion and 
tomato. Also, many administrative measures have been taken-up to address the 
price pressures in pulses such as subsidised retail sale, stock limits and easing 
imports.
Estimates suggest that India's retail price inflation will align progressively with 
the target. Global commodity prices are expected to decline, potentially easing 
core and food inflation. Long-term price stability could be achieved by robust 
data systems for monitoring prices, developing climate-resilient crops, reducing 
crop damage and post-harvest losses.
Economic Survey 2024-25
118
INTRODUCTION
4.1. In the ever-evolving landscape of global economics, understanding the dynamics 
of inflation is crucial. The persistent inflationary pressures pose several challenges for 
policymakers and the general public. On the global front, central banks are cautiously 
unwinding their restrictive policies to balance inflation control with economic recovery. 
In India, the various government initiatives and monetary policy reviews are helping to 
keep inflationary pressure at check.
4.2. Global inflation peaked at 8.7 per cent in 2022, driven by supply chain disruptions 
and geopolitical tensions, to 5.7 per cent in 2024
1
. In India, retail inflation moderated 
from 5.4 per cent in FY24 to 4.9 per cent in FY25 (April-December) despite challenging 
food price dynamics. Food items constitute about two-fifths of the consumer price index 
in India. Hence, the Consumer Food Price Index (CFPI) is a significant determinant of 
retail inflation. In recent years, food inflation has been a major contributor to headline 
inflation. However, an increase in prices is not widespread across all food categories. It 
is primarily driven by a few items. 
4.3. Given this context, the chapter is organised into four sections. Section 2 analyse the 
global inflation, while Section 3 examines the domestic inflation trends and discusses 
the proximate factors affecting inflation dynamics. The chapter concludes with a set 
of recommendations in Section 4. The idea behind this presentation plan is to give 
an overview about inflation dynamics to policymakers and stakeholders to help them 
navigate the complexities of managing inflation.
GLOBAL INFLATION
Global resilience amid synchronised monetary policy tightening 
4.4. Despite the sharp and synchronised tightening of monetary policy across countries, 
the global economy has demonstrated an unusual level of resilience in output growth 
throughout the disinflationary process. This resilience is reflected in the steady decline 
of the headline inflation rate in most countries during FY24 and the current year. The 
concerted efforts by central banks to curb inflation through increased interest rates 
and other policy measures have yielded positive outcomes, resulting in a significant 
reduction in inflationary pressures.
1  International Monetary Fund (2025, January) World Economic Outlook Update-Global growth: Divergent and 
Uncertain. Washington, DC. (https://tinyurl.com/29ussy2x)
Page 3


117
PRICES AND INFLATION: 
UNDERSTANDING THE 
DYNAMICS 
In gauging the health of the global economy, understanding the trends in 
inflation is essential. While global inflation peaked in 2022 due to supply chain 
disruptions and geopolitical tensions, it has declined since then, aided by policy 
measures. In India, retail inflation eased in FY25 due to timely interventions by 
the government and the Reserve Bank of India. Core inflation reached its lowest 
point in a decade, while food inflation was affected by supply chain disruptions 
and adverse weather conditions.
Onion and tomato prices are affected by the decline in production, partly due 
to extreme weather conditions and monsoon-induced supply chain disruptions. 
On pulses, despite being a major producer, India faces a gap in demand and 
supply. The government has undertaken several measures to rein in the prices 
of vegetables like onion and tomato which included procurement and buffer 
stocking of onion under price stabilisation fund and subsidised sale of onion and 
tomato. Also, many administrative measures have been taken-up to address the 
price pressures in pulses such as subsidised retail sale, stock limits and easing 
imports.
Estimates suggest that India's retail price inflation will align progressively with 
the target. Global commodity prices are expected to decline, potentially easing 
core and food inflation. Long-term price stability could be achieved by robust 
data systems for monitoring prices, developing climate-resilient crops, reducing 
crop damage and post-harvest losses.
Economic Survey 2024-25
118
INTRODUCTION
4.1. In the ever-evolving landscape of global economics, understanding the dynamics 
of inflation is crucial. The persistent inflationary pressures pose several challenges for 
policymakers and the general public. On the global front, central banks are cautiously 
unwinding their restrictive policies to balance inflation control with economic recovery. 
In India, the various government initiatives and monetary policy reviews are helping to 
keep inflationary pressure at check.
4.2. Global inflation peaked at 8.7 per cent in 2022, driven by supply chain disruptions 
and geopolitical tensions, to 5.7 per cent in 2024
1
. In India, retail inflation moderated 
from 5.4 per cent in FY24 to 4.9 per cent in FY25 (April-December) despite challenging 
food price dynamics. Food items constitute about two-fifths of the consumer price index 
in India. Hence, the Consumer Food Price Index (CFPI) is a significant determinant of 
retail inflation. In recent years, food inflation has been a major contributor to headline 
inflation. However, an increase in prices is not widespread across all food categories. It 
is primarily driven by a few items. 
4.3. Given this context, the chapter is organised into four sections. Section 2 analyse the 
global inflation, while Section 3 examines the domestic inflation trends and discusses 
the proximate factors affecting inflation dynamics. The chapter concludes with a set 
of recommendations in Section 4. The idea behind this presentation plan is to give 
an overview about inflation dynamics to policymakers and stakeholders to help them 
navigate the complexities of managing inflation.
GLOBAL INFLATION
Global resilience amid synchronised monetary policy tightening 
4.4. Despite the sharp and synchronised tightening of monetary policy across countries, 
the global economy has demonstrated an unusual level of resilience in output growth 
throughout the disinflationary process. This resilience is reflected in the steady decline 
of the headline inflation rate in most countries during FY24 and the current year. The 
concerted efforts by central banks to curb inflation through increased interest rates 
and other policy measures have yielded positive outcomes, resulting in a significant 
reduction in inflationary pressures.
1  International Monetary Fund (2025, January) World Economic Outlook Update-Global growth: Divergent and 
Uncertain. Washington, DC. (https://tinyurl.com/29ussy2x)
Page 4


117
PRICES AND INFLATION: 
UNDERSTANDING THE 
DYNAMICS 
In gauging the health of the global economy, understanding the trends in 
inflation is essential. While global inflation peaked in 2022 due to supply chain 
disruptions and geopolitical tensions, it has declined since then, aided by policy 
measures. In India, retail inflation eased in FY25 due to timely interventions by 
the government and the Reserve Bank of India. Core inflation reached its lowest 
point in a decade, while food inflation was affected by supply chain disruptions 
and adverse weather conditions.
Onion and tomato prices are affected by the decline in production, partly due 
to extreme weather conditions and monsoon-induced supply chain disruptions. 
On pulses, despite being a major producer, India faces a gap in demand and 
supply. The government has undertaken several measures to rein in the prices 
of vegetables like onion and tomato which included procurement and buffer 
stocking of onion under price stabilisation fund and subsidised sale of onion and 
tomato. Also, many administrative measures have been taken-up to address the 
price pressures in pulses such as subsidised retail sale, stock limits and easing 
imports.
Estimates suggest that India's retail price inflation will align progressively with 
the target. Global commodity prices are expected to decline, potentially easing 
core and food inflation. Long-term price stability could be achieved by robust 
data systems for monitoring prices, developing climate-resilient crops, reducing 
crop damage and post-harvest losses.
Economic Survey 2024-25
118
INTRODUCTION
4.1. In the ever-evolving landscape of global economics, understanding the dynamics 
of inflation is crucial. The persistent inflationary pressures pose several challenges for 
policymakers and the general public. On the global front, central banks are cautiously 
unwinding their restrictive policies to balance inflation control with economic recovery. 
In India, the various government initiatives and monetary policy reviews are helping to 
keep inflationary pressure at check.
4.2. Global inflation peaked at 8.7 per cent in 2022, driven by supply chain disruptions 
and geopolitical tensions, to 5.7 per cent in 2024
1
. In India, retail inflation moderated 
from 5.4 per cent in FY24 to 4.9 per cent in FY25 (April-December) despite challenging 
food price dynamics. Food items constitute about two-fifths of the consumer price index 
in India. Hence, the Consumer Food Price Index (CFPI) is a significant determinant of 
retail inflation. In recent years, food inflation has been a major contributor to headline 
inflation. However, an increase in prices is not widespread across all food categories. It 
is primarily driven by a few items. 
4.3. Given this context, the chapter is organised into four sections. Section 2 analyse the 
global inflation, while Section 3 examines the domestic inflation trends and discusses 
the proximate factors affecting inflation dynamics. The chapter concludes with a set 
of recommendations in Section 4. The idea behind this presentation plan is to give 
an overview about inflation dynamics to policymakers and stakeholders to help them 
navigate the complexities of managing inflation.
GLOBAL INFLATION
Global resilience amid synchronised monetary policy tightening 
4.4. Despite the sharp and synchronised tightening of monetary policy across countries, 
the global economy has demonstrated an unusual level of resilience in output growth 
throughout the disinflationary process. This resilience is reflected in the steady decline 
of the headline inflation rate in most countries during FY24 and the current year. The 
concerted efforts by central banks to curb inflation through increased interest rates 
and other policy measures have yielded positive outcomes, resulting in a significant 
reduction in inflationary pressures.
1  International Monetary Fund (2025, January) World Economic Outlook Update-Global growth: Divergent and 
Uncertain. Washington, DC. (https://tinyurl.com/29ussy2x)
Page 5


117
PRICES AND INFLATION: 
UNDERSTANDING THE 
DYNAMICS 
In gauging the health of the global economy, understanding the trends in 
inflation is essential. While global inflation peaked in 2022 due to supply chain 
disruptions and geopolitical tensions, it has declined since then, aided by policy 
measures. In India, retail inflation eased in FY25 due to timely interventions by 
the government and the Reserve Bank of India. Core inflation reached its lowest 
point in a decade, while food inflation was affected by supply chain disruptions 
and adverse weather conditions.
Onion and tomato prices are affected by the decline in production, partly due 
to extreme weather conditions and monsoon-induced supply chain disruptions. 
On pulses, despite being a major producer, India faces a gap in demand and 
supply. The government has undertaken several measures to rein in the prices 
of vegetables like onion and tomato which included procurement and buffer 
stocking of onion under price stabilisation fund and subsidised sale of onion and 
tomato. Also, many administrative measures have been taken-up to address the 
price pressures in pulses such as subsidised retail sale, stock limits and easing 
imports.
Estimates suggest that India's retail price inflation will align progressively with 
the target. Global commodity prices are expected to decline, potentially easing 
core and food inflation. Long-term price stability could be achieved by robust 
data systems for monitoring prices, developing climate-resilient crops, reducing 
crop damage and post-harvest losses.
Economic Survey 2024-25
118
INTRODUCTION
4.1. In the ever-evolving landscape of global economics, understanding the dynamics 
of inflation is crucial. The persistent inflationary pressures pose several challenges for 
policymakers and the general public. On the global front, central banks are cautiously 
unwinding their restrictive policies to balance inflation control with economic recovery. 
In India, the various government initiatives and monetary policy reviews are helping to 
keep inflationary pressure at check.
4.2. Global inflation peaked at 8.7 per cent in 2022, driven by supply chain disruptions 
and geopolitical tensions, to 5.7 per cent in 2024
1
. In India, retail inflation moderated 
from 5.4 per cent in FY24 to 4.9 per cent in FY25 (April-December) despite challenging 
food price dynamics. Food items constitute about two-fifths of the consumer price index 
in India. Hence, the Consumer Food Price Index (CFPI) is a significant determinant of 
retail inflation. In recent years, food inflation has been a major contributor to headline 
inflation. However, an increase in prices is not widespread across all food categories. It 
is primarily driven by a few items. 
4.3. Given this context, the chapter is organised into four sections. Section 2 analyse the 
global inflation, while Section 3 examines the domestic inflation trends and discusses 
the proximate factors affecting inflation dynamics. The chapter concludes with a set 
of recommendations in Section 4. The idea behind this presentation plan is to give 
an overview about inflation dynamics to policymakers and stakeholders to help them 
navigate the complexities of managing inflation.
GLOBAL INFLATION
Global resilience amid synchronised monetary policy tightening 
4.4. Despite the sharp and synchronised tightening of monetary policy across countries, 
the global economy has demonstrated an unusual level of resilience in output growth 
throughout the disinflationary process. This resilience is reflected in the steady decline 
of the headline inflation rate in most countries during FY24 and the current year. The 
concerted efforts by central banks to curb inflation through increased interest rates 
and other policy measures have yielded positive outcomes, resulting in a significant 
reduction in inflationary pressures.
1  International Monetary Fund (2025, January) World Economic Outlook Update-Global growth: Divergent and 
Uncertain. Washington, DC. (https://tinyurl.com/29ussy2x)