Inflation, consumption outlook 2026: Policy support and low inflation expected to sustain demand recovery

Government CPI component data show that food prices were unusually soft through large parts of 2025

• India's consumption-led growth to strengthen in 2026 with moderate inflation.
• Policy support and rate cuts have improved incomes and borrowing conditions.
• Rural and urban consumption expected to broaden as inflation stays low

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India enters 2026 with the foundations of a consumption-led growth cycle strengthening, as economists expect moderate inflation, policy support and improving demand conditions to reinforce the recovery that gathered pace in the second half of 2025. With direct tax relief, GST reductions and cumulative monetary policy rate cuts already feeding into disposable incomes and borrowing conditions, the macro environment is seen as conducive to a broader consumption upturn across both rural and urban segments in the coming year, they say.

Economists say the alignment of benign inflation trends, improved household purchasing power and supportive fiscal–monetary measures is likely to sustain momentum into 2026 and provide resilience to growth in an uncertain global environment.

Sakshi Gupta, VP & Principal Economist at HDFC Bank, said inflation is likely to remain moderate in the year ahead, supported by favourable supply conditions and policy measures.

“Inflation is expected to remain fairly moderate in 2026, with healthy food supply, lower global commodity prices and the impact of GST cuts supporting the price outlook. Consumption recovery is expected to broaden further over FY27, with monetary and fiscal measures in FY26 helping lift demand. While rural demand momentum has been visibly better this year, urban demand conditions could also more sustainably lift up over the coming months,” she told Moneycontrol.

Sustaining a broader demand-led cycle

With inflation expectations anchored, disposable incomes supported by earlier policy measures and monetary transmission continuing into 2026, analysts expect consumption to broaden further across both rural and urban segments. The key question for the year ahead will be whether household demand consolidates into a durable, demand-led growth cycle, amid a challenging global backdrop.

2025 set the base

The outlook for 2026 has been shaped by developments through 2025, when inflation remained below earlier expectations. According to official CPI releases issued by the Ministry of Statistics and Programme Implementation (MOSPI), retail inflation stayed within the 2–6 percent tolerance band for most of the year, with several months reflecting soft price pressures driven by contained food inflation and favourable supply conditions.

Government data show that retail inflation remained unusually low through much of 2025, creating policy space for growth-supportive measures. According to CPI releases issued by the Ministry of Statistics and Programme Implementation, inflation eased to 2.82 percent in May 2025 and further to 2.10 percent in June 2025, with food inflation turning negative in that month. Through the latter part of the year, headline inflation remained well below earlier expectations — with 1.54 percent in September 2025, 0.25 percent in October 2025 and 0.71 percent in November 2025 – levels that reinforced the disinflationary trend and strengthened real household purchasing power.

Economists noted that the disinflationary environment improved real household purchasing power and created space for policy support in 2025.

“Inflation stayed consistently below expectations in 2025, enabling space for policy response to support growth, especially consumption that had trailed overall GDP growth in past years. The government responded with easing income-tax rates as well as Goods and Services Taxes that together left about Rs 1.5 trillion as disposable savings in the hands of taxpayers. With inflation low and above-average monsoon rains keeping the food inflation outlook benign, the Reserve Bank of India complemented these efforts by cutting policy rates by 125 basis points cumulatively,” Sujit Kumar, Chief Economist, National Bank for Financing Infrastructure and Development (NABFID), told Moneycontrol.

He added that rising equity and gold prices generated positive wealth effects, helping consumption recover in the second half of 2025, with the momentum expected to carry forward into 2026.

Consumption indicators in 2025

Government-reported national accounts data on Private Final Consumption Expenditure (PFCE) indicated that consumption activity began firming up through 2025, with momentum becoming more visible later in the year. Official releases reflected stronger household spending compared with the previous year, supported by lower inflation, policy-driven disposable-income gains and improving sentiment.

Government data for the first half of FY2025-26 indicate that consumption demand improved alongside broader economic momentum. According to MoSPI’s quarterly GDP estimates, Real Private Final Consumption Expenditure (PFCE) grew 7.0 percent in Q1 FY2025-26 and 7.9 percent in Q2 FY2025-26, compared with 6.4 percent in the corresponding quarters of the previous year, reflecting a strengthening in household spending. Over the same period, real GDP expanded 7.8 percent in Q1 and 8.2 percent in Q2, emphasising firm domestic demand conditions through the April–September 2025 period.

These trends point to 2025 marking a transition from uneven consumption growth to a more stable recovery base, which the 2026 outlook now builds upon.

Consumption trends:

Food and essentials

Government CPI component data show that food prices were unusually soft through large parts of 2025, helping stabilise spending on essentials. According to MoSPI releases, food inflation (CFPI) was in negative territory, at –2.28 percent in September 2025, and fell further to –5.02 percent in October 2025, with both rural and urban food inflation deeply negative — a rare trend that eased cost pressures for households. This supported rural consumption, where food expenditure forms a higher share of overall household budgets.

Transport, fuel and mobility-linked services

Government CPI component data show that price pressures in transport and mobility-linked categories remained moderate through 2025. According to MoSPI releases, the Transport & Communication index recorded inflation of 3.90 per cent in June 2025, while the Fuel & Light category was up 2.55 per cent in the same month, indicating stable cost conditions for mobility and energy expenditures. In the latest provisional data for November 2025, transport inflation eased to 0.88 per cent and fuel inflation to 2.32 per cent, emphasising continued moderation in costs that matter for household mobility and commuting.