Taking cognisance of households’ inflation expectations in India

ABSTRACT

The paper studies characteristics of inflation expectations in developed and emerging economies. It finds that properties of expectations in India share similarities to those in other economies. Acknowledging the inherent bias in expectations in India, this paper proceeds to find one of the many possible use cases for capturing households’ expectations. It attempts to find a relationship between households’ expectations and their future savings pattern. The analysis indicates households’ reduced preference for bank term deposits when they expect rising inflation. Hence, households’ inflation expectations despite bearing upward bias should be tracked to assess households’ behavioural decisions, such as future savings

KEYWORDS:

• Household expenditure
• household savings
• inflation expectations

JEL classification:

• D84
• E20
• E21
• E30
• E31

Acknowledgments

The authors are thankful to the reviewers and the associate editor for providing valuable comments which helped in improving the manuscript.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1. Households report inflation expectations for some time period ahead. In this paper, the period for which the expectations are reported is termed as the realized period. The actual inflation for that period is termed as realized inflation for the period.

2. CPIU series prior to January 2011 has been back-casted by using the Consumer Price Index of Industrial Workers (CPI-IW) series with base year 2001. Back-casting has been done by applying unitary method to imitate the CPI-IW growth in the CPIU series.

3. ‘Euclidean’ distance is calculated as $d_{\mathit{euc}}\left(\mathit{x},\mathit{y}\right)=\sqrt{\sum _{\mathit{i}=1}^n{\left(x_i-y_i\right)}^2}$, where, $x_i$ and $y_i$ denote standardized inflation expectations of two different survey centres observed at the $i^{\mathit{th}}$ time point, $\mathit{i}=1,2,\dots ,\mathit{n}$.

4. CPI-IW inflation series is used to obtain a long time series.

5. The survey centres which have remained common since the inception of the survey has been considered for this analysis. As CPI-IW series for Patna is not available, hence the inflation values corresponding to Munger Jamalpur in Bihar have been considered.

6. The series CPI-IW has been considered for this analysis to get a long time-series data.

7. Net response on inflation expectations is defined here as percentage of respondents expecting rise in inflation (out of those expecting price increase) minus percentage of respondents expecting fall in inflation (out of those expecting prise increase).

8. ‘Non-food’ products in the IESH questionnaire and ‘Transport and Communication’ in CPI-IW include petrol.

9. Annual population figures are considered from the estimates published by the Central Statistics Office, MOSPI. Quarterly figures are then arrived by distributing the annual change in population across the quarters.

10. Year-on-year CPI-C based inflation was subtracted from nominal interest rates to arrive at real interest rates.

Additional information

Notes on contributors

Devendra Pratap Singh

Devendra Pratap Singh has been working in the Reserve Bank of India (RBI), Mumbai for the last 25 years and at present holds designation of a General Manager. He did his master’s degree in Statistics from Banaras Hindu University, India in 1992. He has experience of working in RBI in the field of Banking Supervision, conduct of household surveys and risk management.

Aditya Mishra

Aditya Mishra is an Assistant General Manager in the Reserve Bank of India (RBI). He has been working in RBI since 2016 and has worked in the fields of household surveys and forex reserves management. He did his bachelor’s in technology from the Indian Institute of Technology, Benares Hindu University, India in 2010. He has published articles in areas of consumer confidence and inflation expectations.

Purnima Shaw

Purnima Shaw is working as an Assistant Adviser in the Reserve Bank of India. She received her Ph.D. from West Bengal State University, India in 2021. Her research interests include survey sampling, inflation expectations, fan charts and official statistics. She has 21 publications in journals and bulletins including Journal of the American Statistical Association, Communications in Statistics – Theory and Methods, Handbook of Statistics, Irving Fisher Committee Bulletin and Reserve Bank of India Bulletin.