Role of Inflation-Expectation

May 4, 2022
Posted by: OptimizeIAS Team
Category: DPN Topics

Role of Inflation-Expectation

Subject: Economy

Section: Monetary Policy

Context:

The RBI released the Inflation Expectations Survey of Households (IESH) for March on Friday.

Details:

It presented gender based differences in the inflation expectations i.e women have systematically higher inflationary expectations compared to men.

Cause:

The traditional gender roles that explain this divergence women, arguably homemakers, traditionally do more frequent grocery shopping than men.

Impact of Inflation expectation on Inflation:

Increase Inflation-If individuals anticipate high inflation, they would negotiate wages or rents to compensate against a potential fall in their purchasing power. Increased wages raise the cost of production, making expectations self-fulfilling and, therefore, playing a pivotal role in determining inflation.
Harm saving-consumption behaviour-as having ramifications on an individual’s long-term wealth.

Policy Measures

Central banks raise interest rates to stabilize high inflationary expectations primarily when price shocks are temporary, on account of drought or disruption in global supply chains,so that inflation expectations do not transmit into actual inflation.

Issue:

Change in inflation expectation mainly due to changes in price of daily use items-the prices of the lower-priced potatoes, milk, or apples frequently purchased shape the aggregate inflation expectations more than that of infrequent purchase of a high-priced car or a washing machine, even though they constitute a substantial expenditure share of the individual.

Therefore, generalising aggregate inflation expectations for making general views of prices in the economy could be misleading and could lead to perverse policy making.

Alternative:

Supply management of volatile goods purchased daily could be more effective in anchoring inflationary expectations.

Inflation Expectations Survey of Households-(covered in DPN April)
- The survey is conducted at bi-monthly intervals by the Reserve Bank of India.
- It provides directional information on near-term inflationary pressures as expected by the respondents and may reflect their own consumption patterns. Hence, they should be treated as households’ sentiments on inflation.
- The survey aims at capturing subjective assessments on price movements and inflation, of approximately 6,000 households, based on their individual consumption baskets, across 18 cities, including -Ahmedabad, Bengaluru, Bhopal, Bhubaneswar, Chandigarh.
- The survey seeks qualitative responses from households on price changes (general prices as well as prices of specific product groups).
- It measures Households’ median inflation perceptions in three periods– for the current period, three months ahead as well as in the one year ahead period.