India's consumer price index rose 4.25 percent on the year in May, moderating from 4.70 percent in April and just below the consensus forecast of 4.40 percent. Inflation was last around these levels in late 2021 and is now just above the mid-point of the Reserve Bank of India's target range of 2.0 percent to 6.0 percent after persisting around 7.0 percent for several months in mid-2022. The index advanced 0.51 percent on the month, as it did previously.

Food and beverage prices, which account for more than half the weight of the CPI index, were the major factor driving headline inflation lower in May. These prices rose 3.29 percent on the year after increasing 4.22 percent previously. Fuel and light charges, around 8 percent of the index also rose at a slower pace, up 4.64 percent on the year after increasing 5.52 percent previously. Inflation in urban areas fell from 4.85 percent in April to 4.27 percent in May, while inflation in rural areas dropped from 4.68 percent to 4.17 percent.

The RBI left policy rates on hold at their most recent meeting held last week, after increasing them by a cumulative 250 basis points since May 2022. Despite leaving rates on hold, officials noted that the inflation outlook will depend on rainfall patterns during the monsoon season and advised they"will continue to keep a strong vigil on the evolving inflation and growth outlook". They also promised to"remain focused" on withdrawing policy accommodation, suggesting that upside risks to the inflation outlook remain their primary concern for now, despite the moderation seen in recent months.

Consumer prices are expected to ease to 4.4 percent on the year in May versus 4.7 percent in April which was sizably lower than expectations for 5.5 percent.

The Consumer Price Index (CPI) is a measure of the average price level of a fixed basket of goods and services purchased by consumers. Within the overall CPI basket, food (47 percent) has easily the largest weight of any of the major components and a separate consumer foods price index is also released. Monthly and annual changes in the CPI provide widely used measures of inflation and the latter is the policy target of the Reserve Bank of India (RBI).

CPI numbers are widely used as a macroeconomic indicator of inflation, as a tool by governments and central banks for inflation targeting and for monitoring price stability, and as deflators in the national accounts. CPI is also used for indexing dearness allowance to employees for increase in prices. CPI is therefore considered as one of the most important economic indicators.

CPI numbers presently compiled and released at national level for India reflect the fluctuations in retail prices pertaining to specific segments of population in the country -- industrial workers, agricultural labourers and rural labourers. These indexes do not encompass all the segments of the population in the country and as such do not reflect true picture of the price behavior in the country. To overcome the above, the Central Statistics Office (CSO) of the Ministry of Statistics and Programme Implementation has started compiling new series of CPI for the entire urban population or CPI (Urban) and CPI for the entire rural population or CPI (Rural), which reflect the changes in the price levels of various goods and services consumed by the urban and rural population.