Elephant out for a Walk and Other Tales

The RBI's bi-monthly inflationary expectations survey, which was conducted during March 2-11, 2024, just before the general elections and gathered insights from 6083 respondents across 19 cities, says households perceived the current inflation rate to be 8.1 per cent. The study says the rate is consistent with the perceived rate during the previous survey in January 2024, writes Tulsi Jayakumar.

The Reserve Bank of India Governor, Shaktikanta Das, in a statement to coincide with the bi-monthly monetary policy statement, described the battle against inflation thus: “Two years ago, around this time, when CPI inflation had peaked at 7.8 per cent in April 2022, the elephant in the room was inflation. The elephant has now gone out for a walk and appears to be returning to the forest. We would like the elephant to return to the forest and remain there on a durable basis. In other words, it is essential, in the best interest of the economy, that CPI inflation continues to moderate and aligns to the target on a durable basis. Till this is achieved, our task remains unfinished."

Is the elephant returning to the forest indeed? The bi-monthly inflationary expectations survey of households may question the assumption that inflation is on a downward trend! The survey conducted during March 2-11, 2024, just before the general elections, gathered insights from 6083 respondents across 19 cities.

According to the survey, households perceived the current inflation rate to be 8.1 per cent , consistent with the perceived rate during the previous survey in January 2024. Expectations for inflation over the next three months and one year were 9.0 per cent and 9.8 per cent respectively, slightly lower than the previous survey by 20 basis points each, but still indicating high inflationary expectations.

How reliable are such measures? The sample size of the survey reflects the approximate total number of households in India, which stood at around 319 million by 2024, making it a reliable representation. Moreover, the use of the median measure in the survey methodology enhances its reliability by mitigating the influence of extreme values.

More importantly, why do inflationary expectations hold significance? Imagine that you expect the prices of onions to rise next week due to heavy rains destroying the onion crop in Nashik. You will go out and buy onions today, hiking up the prices. Thus, Household inflationary expectations matter!

They drive actual inflation up in subsequent rounds by driving up consumption. Contrast the household inflationary expectations with the latest actual inflation data, measured by the combined Consumer Price Index, for February 2024, which stood at 5.09 per cent. Policy makers would need to monitor and manage inflationary expectations, so as to mitigate their potential impact on the actual inflation in the time period ahead.

Analysts however do not just focus on the level of the expected inflation. They also track the trends in these expectations, such as whether consumers expect the pace of inflation to be rising, falling, or remaining stable. Again, the RBI’s Household Inflationary Expectations Survey throws up interesting results. Looking at the three-month ahead expectations, the proportion of respondents expecting the prices to increase (at 76.5%) is the highest, with those expecting the prices to remain stable or decline being 19.6 and 3.9 per cent respectively.

However, among those who expect the prices to increase, an overwhelming proportion of 53.1 per cent respondents expect the prices to increase more than the current rate. The numbers are even more damning when we analyze the one-year ahead expectations.

The proportions expecting a price increase, stable prices and price decline are 87.4%, 9.7% and 2.9% respectively, while 64.7% respondents expect the prices one year ahead to increase more than the current rate. Clearly, a significant proportion of respondents anticipate higher prices in the coming months and year.

Finally, turning to the distribution of respondents’ current inflation perceptions and inflationary expectations, the largest number of respondents (1170, which works out to close to 20% of the respondents) perceive the current inflation to be between 10-11 per cent. Similarly, the inflationary expectations held by the most number of respondents, both for the three-month ahead and the one- year ahead expectations, was of a more than 16% inflation! Thus, 937 of the 6083 respondents and 1096 of the 6083 respondents responded that their inflationary expectations over a three-month ahead and one-year ahead horizon was more than 16%.

Clearly, the elephant is not back in the forest and the Indian economy is not yet out of the inflationary woods. It might be too early to pop the bubbly and celebrate the return of “Acche Din”. The spectre of inflation is ging to be haunting India for some time now. Amidst this background, the RBI’s monetary policy decision to keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 6.50 per cent is a prudent move!

(Tulsi Jayakumar is Professor, Finance & Economics and Executive Director, Centre for Family Business & Entrepreneurship at Bhavan’s SPJIMR. Views are personal)