Core Inflation in India 2025: The Gold and Silver Effect – Economic Survey 2025-26 Analysis
Core inflation has traditionally been viewed as the most informative measure of underlying price pressures in an economy, stripped of the noise from volatile food and fuel prices. However, the Economic Survey 2025-26 presents a fascinating finding that challenges conventional understanding of core inflation in the Indian context. The apparent stickiness of core inflation in FY26 is largely explained by surges in precious metal prices rather than broad-based demand pressures. This article examines the core inflation dynamics in India and their implications for monetary policy.
What is Core Inflation and Why Does It Matter?
Before diving into the Economic Survey 2025-26's analysis, it helps to understand what core inflation represents and why policymakers focus on it. Core inflation is headline inflation minus the contribution of food and fuel prices. These categories are excluded because they are subject to supply shocks that monetary policy cannot directly address.
For example, if a poor monsoon raises vegetable prices, the Reserve Bank of India cannot grow more vegetables by raising interest rates. Similarly, if global oil prices spike due to Middle East tensions, domestic monetary policy cannot increase oil production. These supply-driven price increases are temporary and typically reverse when conditions normalise.
Core inflation, by contrast, is expected to reflect the underlying demand conditions in the economy. If businesses can raise prices because consumers are flush with money and willing to pay more, this indicates demand-pull inflation that monetary policy can and should address. Rising core inflation suggests that the economy may be overheating and warrants a policy response.
Central banks globally pay close attention to core inflation for these reasons. In developed economies where food accounts for a small share of consumer spending, core inflation is often the primary focus of monetary policy. In India, both headline and core matter, but core provides signals about underlying demand pressures.
The Puzzle: Rising Core Amid Falling Headline
The Economic Survey 2025-26 presents a puzzle that has implications for monetary policy interpretation. While headline CPI inflation declined to 1.7 per cent during April-December FY26, the lowest in the current series, core inflation exhibited persistence and even increased.
According to the survey, the average reading of core inflation increased from 3.5 per cent in FY25 to about 4.3 per cent in FY26. More granularly, core inflation rose from 3.19 per cent in April 2024 to 4.62 per cent in December 2025. This apparent divergence between falling headline inflation and rising core inflation creates an interpretation challenge.
If core inflation is rising while headline falls, it could suggest that underlying demand pressures are building even as food prices moderate. This would be a concerning signal that might warrant caution in monetary easing. The RBI might worry that cutting rates aggressively could fuel demand and eventually push headline inflation higher once the favorable food price effects fade.
However, the Economic Survey 2025-26 offers a different interpretation that challenges this surface-level reading of the data.
Decrypting Core Inflation: The Precious Metals Effect
The Economic Survey 2025-26 provides what it calls a decryption of core inflation dynamics. The key insight is that the apparent persistence in core inflation is largely driven by sharp increases in the prices of precious metals, specifically gold and silver.
Gold and silver prices touched lifetime highs during 2025 amid heightened global uncertainty and strong safe-haven demand. The survey notes that gold rose from USD 2607 to USD 4315 per ounce during 2025, with prices reaching USD 5101.34 as of 26th January 2026. This represents an increase of over 65 per cent in a single year.
Since gold and silver are included in the CPI basket but are excluded from food and fuel, they appear in the core inflation calculation. Their dramatic price increases pushed up measured core inflation even though other core components were relatively benign.
The survey quantifies this effect precisely. The wedge between usual core inflation and core inflation excluding precious metals amounts to approximately 235 basis points. In other words, if gold and silver are excluded from core, core inflation would be about 2.35 percentage points lower than the headline core number suggests.
Core Inflation Excluding Precious Metals: The True Picture
When the Economic Survey 2025-26 excludes gold and silver from the core inflation calculation, a very different picture emerges. Core inflation excluding precious metals decelerated from 3.4 per cent in June to 2.3 per cent in December 2025, even as the standard core measure remained elevated at around 4.6 per cent.
This is a remarkable finding. The adjusted core measure declined by over 100 basis points in just six months, broadly mirroring the moderation in headline inflation. This suggests that underlying price pressures, stripped of the precious metals effect, are actually softening rather than firming.
The survey emphasizes that this divergence indicates that the recent firmness in core inflation primarily reflects price pressures from precious metals rather than a broad-based strengthening of underlying inflationary momentum. There is limited demand-side overheating in the economy.
This interpretation has significant implications for monetary policy. If core inflation is rising due to gold prices driven by global uncertainty, this is not a signal of domestic demand overheating. Raising interest rates would not affect gold prices, which are determined in global markets. Therefore, the RBI can focus on the adjusted core measure and the growth mandate without worrying excessively about headline core numbers.
Why Are Gold and Silver Prices Surging?
Understanding the drivers of gold and silver prices helps contextualise why they should be treated differently from other core inflation components. The Economic Survey 2025-26 identifies several factors behind the precious metals surge.
Global uncertainty and geopolitical tensions have driven safe-haven demand. Investors seek gold as a store of value during times of political instability, military conflicts, and trade wars. The survey discusses three global scenarios, all involving significant uncertainty, which supports continued safe-haven demand.
Expectations of monetary easing in major economies, particularly the United States, support gold prices. Gold is often inversely related to real interest rates because holding gold has an opportunity cost equal to the interest that could be earned on bonds. When rates are expected to fall, gold becomes relatively more attractive.
Central banks globally have been increasing gold holdings as a reserve asset, partly to diversify away from US dollar reserves. The Economic Survey 2025-26 notes that India's gold reserves rose sharply to USD 117.5 billion as of January 2026, compared with USD 78.2 billion at end March 2025. This reflects both valuation gains and actual purchases.
Domestic demand for gold jewelry and investment also remains strong in India. Gold imports increased by 27.4 per cent year-on-year in FY25, driven by strong domestic consumption even at elevated prices.
The Four Major Components of Core Inflation
The Economic Survey 2025-26 discusses the four major components of the core CPI basket that account for nearly one-third of the overall basket and more than 60 per cent of the core measure. These are clothing and footwear, housing, health, and transport and communication.
Over the past two years, inflation has been gradually easing in three of the four components, while fluctuating in the fourth. Since Q2 of FY26, signs of disinflation appeared in these components other than housing.
Clothing and footwear inflation has moderated as global cotton and synthetic fiber prices stabilised. Health inflation, which had been elevated during and after the pandemic, has also eased. Transport and communication costs have benefited from lower fuel prices and competitive pressures in telecom.
Housing inflation has shown more persistence, partly reflecting the lagged nature of rental adjustments. Rent increases typically occur annually rather than monthly, so changes in rental market conditions take time to show up in the inflation data.
Rural vs Urban Core Inflation
The Economic Survey 2025-26 examines rural and urban core inflation dynamics. Core inflation in both rural and urban areas follows a smoother and more gradual adjustment path compared to headline inflation. Both declined steadily through 2023 and early 2024 before stabilising within a relatively narrow range thereafter.
Rural core inflation remains marginally higher than urban core inflation, but the gap is modest and stable. This indicates broadly similar pricing behaviour and demand patterns across regions once volatile food and fuel components are excluded.
The convergence of rural and urban core inflation reflects increasing market integration and more uniform demand conditions across the country. Better connectivity and digital payments have integrated rural markets more closely with urban economies.
Monetary Policy Implications
The Economic Survey 2025-26's analysis of core inflation has important implications for monetary policy. The key takeaway is that the RBI should not be misled by the headline core inflation number, which is inflated by precious metals prices beyond monetary policy's influence.
With adjusted core inflation declining to around 2.3 per cent, well below the 4 per cent target, there is room for accommodative monetary policy focused on growth support. The RBI has indeed pursued rate cuts during 2025, and low underlying inflation validates this approach.
However, the survey also cautions that the trajectory of core inflation will need to be closely monitored. Global commodity prices, including base metals used in manufacturing, could exert upward pressure if demand strengthens. The survey suggests that core inflation excluding precious metals may be higher, not lower, in FY27 if gold and silver price increases moderate.
The inflation outlook section of the survey notes that global commodity prices are expected to decline by approximately 7 per cent in FY27, primarily driven by subdued crude oil prices. However, base metal prices, particularly copper, may remain elevated due to demand from green technology and supply disruptions. This mixed picture requires careful monitoring.
Gold in India's Economy: Beyond Inflation
Gold occupies a unique position in India's economy beyond its role in inflation calculations. India is the world's second-largest consumer of gold, and the precious metal has deep cultural and economic significance.
From an external sector perspective, gold imports contribute significantly to the trade deficit. The Economic Survey 2025-26 notes that petroleum crude, gold, and petroleum products account for over one-third of total imports. Sustained demand for gold, even during periods of elevated prices, pressures the trade balance.
From a financial system perspective, gold serves as collateral for loans. The survey mentions that loans against gold jewellery increased by 125.3 per cent year-on-year, likely due to increasing gold prices making gold-backed loans more valuable. Revised guidelines on voluntary pledge of gold and silver jewellery as collateral for small business loans have helped improve credit flow to the MSME segment.
Gold also features in India's foreign exchange reserves, which provide a buffer against external shocks. The growing share of gold in reserves aligns with a broader international pattern where emerging markets have increased gold holdings amid geopolitical uncertainty.
UPSC Relevance: Core Inflation
Core inflation is a crucial concept for UPSC examinations:
- GS-III: Inflation types, measurement, monetary policy
- Economy Optional: Price theory, inflation targeting
- Current Affairs: RBI policy decisions, inflation trends
Practice MCQs on Core Inflation - Economic Survey 2025-26
Q1. According to Economic Survey 2025-26, the apparent rise in core inflation from 3.5% to 4.3% is largely explained by:
(a) Housing costs
(b) Healthcare expenses
(c) Gold and silver prices
(d) Transportation costs
Answer: (c) Gold and silver prices
Q2. The wedge between standard core inflation and core excluding precious metals was approximately:
(a) 135 basis points
(b) 185 basis points
(c) 235 basis points
(d) 285 basis points
Answer: (c) 235 basis points
Q3. According to Economic Survey 2025-26, core inflation excluding precious metals in December 2025 was approximately:
(a) 2.3 per cent
(b) 3.4 per cent
(c) 4.3 per cent
(d) 4.6 per cent
Answer: (a) 2.3 per cent
Q4. Gold prices in 2025 reached approximately USD per ounce by January 2026:
(a) USD 3100
(b) USD 4100
(c) USD 5100
(d) USD 6100
Answer: (c) USD 5100
Q5. The four major components of core inflation accounting for over 60% of core measure are:
(a) Food, fuel, housing, transport
(b) Clothing, housing, health, transport
(c) Rent, utilities, services, durables
(d) Agriculture, manufacturing, services, construction
Answer: (b) Clothing and footwear, housing, health, and transport and communication
Conclusion
The Economic Survey 2025-26's analysis of core inflation provides a masterclass in economic data interpretation. The surface-level reading of rising core inflation would suggest underlying demand pressures that warrant policy caution. However, by drilling down into the components and identifying the precious metals effect, the survey reveals that the true picture is one of softening underlying inflation. Core inflation excluding gold and silver declined to 2.3 per cent, consistent with the benign headline inflation of 1.7 per cent. This nuanced analysis supports an accommodative monetary policy stance while cautioning that precious metals volatility may work in either direction in the coming year. For UPSC aspirants, this topic illustrates the importance of looking beyond headline numbers to understand true economic dynamics.