RBI mentions this inflation expectations survey in its monetary policy, but very little is known about it. There is hardly any discussion. Given how important inflation expectation is for a central bank and economy, it is surprising to see most people giving it a miss. And houselhold surveys are an important way to measure inflation expectations.
The survey is carried out in RBI bulletin. It should ideally be also published as a seperate publication so that people read it.
The recent survey is for the period Jan 10-Mar 10. The survey has superb charts and tables to analyse emerging trends. The recent survey shows inflation expectations are picking up in households:
The perception of current inflation and expectations of three month and one year ahead inflation since Round 5 of the survey are shown in the graph below. The time series movement of the inflation expectations show that the future inflation expectations are usually higher than the current perception. There were, however, few exceptions to this observation- in March 2007 and in December 2008 the future (three month ahead) inflation expectations were lower than the current perception of inflation. The survey shows that during the initial two year period up to March 2008, the inflation expectations were stable and thereafter started rising sharply. There was a subsequent fall starting December 2008 that took the numbers to 5 to 6 per cent band and the inflation expectations have been increasing since then. In the latest round of the survey, the numbers were in the range of 10 to 11 per cent.
It is seen from Chart 2 that the future expectations of inflation move closely in tandem with the current perception of inflation. Thus though the numbers do not attempt to predict the quantum of future inflation, they give useful input on directional movement of inflation – i.e. when the expectations are rising and when they start moderating. The Chart 3 presents the household inflation expectations along with the official inflation measures based on Wholesale Price Index (WPI) and Consumer Price Index for Industrial Workers (CPI-IW). It shows that for a large part of the survey history, the households’ inflation expectations remained between the WPI and CPI-IW inflations.
The volatility in responses over different rounds can be seen from the table below. It can be seen that the uncertainty increases with distance in time. The standard deviation is lower for current inflation rate than for the 3 month and one year ahead. This seems to be on expected track as it is more difficult to identify the forthcoming events and measure their impact on inflation.
The corresponding bubble charts for December 2009 round shows that a high proportion of respondents are expecting the inflation to be in the range of more than 16 per cent. The average inflation expectations in this period were between 11 to 12 per cent. Also the responses are scattered and variability is high. This phenomenon of high variability in households’ inflation expectations has been observed, internationally, during the periods of high inflation.
Hmmm. on expected lines.
For a more detailed technical paper on inflation exp see this