What is inflation expectations?

Inflation expectations is the rate of inflation that different sections of the people including workers, business people and investors expect to prevail in the future. These groups will consider this rate while taking their decision about their future economic activities.

The importance of inflation expectations is that such calculated decisions based on their inflation expectations will influence the future inflation situation in an economy. Deepak Mohanty illustrates the significance of inflation expectations in monetary policy implementation – “ The state of inflation expectations greatly influences actual inflation and, thus, the central bank’s ability to achieve price stability.”

For the RBI, its strategy to counter inflation should not only consider present rate of inflation, but also the inflation expectations driven decisions of the above groups.

This means that the RBI should measure the inflation expectations of the people correctly to design its monetary policy decisions. Many central banks are making inflation expectations survey to estimate people’s anticipation about future inflation. The RBI is also having an inflation expectations survey to enhance its knowledge about people’s anticipation about inflation

RBI’s inflation expectations survey

The Reserve Bank of India has been conducting Inflation Expectations Survey of Households since September 2005 on a quarterly basis. RBI’s survey covers 5,000 households using quota sampling. Samples are collected from 16 cities across the four regions of the country. The survey is based on households’ individual consumption baskets. Survey design is structured to know critical inflation expectations and the respondents are selected by considering geographical and gender categorization.

The survey presents a measure of households’ present perception of inflation as well as their expectations about the near future. Price expectations are sought in the survey for general prices and for five groups: food products, non-food products, consumer durables, housing and services.

The survey seeks (i) qualitative responses on price changes (general prices as well as prices of specific product groups) in the next three months and the next one year and (ii) quantitative responses on current, three month ahead and one year ahead inflation rates.