Measuring inflation expectations

Abstract

As per macroeconomic models of inflation, expectations about inflation are generally thought to play an integral role in decision-making; for consumers/households in consumption decisions and for producers in pricing decisions. Based on these models, inflation expectations are also metrics used by policy makers like central banks in making new policy decisions. Controlling inflation is a prime objective of the Reserve Bank of India. RBI uses a survey-based methodology to capture price and inflation expectations. It has been conducting a quarterly Inflation Expectations Survey of Households (IESH) since September 2005. The survey gives a measure of households’ present perception of inflation as well as future expectations.1 The quality of the survey results is dependent on the quality of the responses generated, which is dependent on behavioral aspects of the survey respondents. However, little is studied about how respondents interpret the survey questions, how the framing of questions affects their answers and how much do expectations really influence behavior. Given the importance of inflation expectations from a microeconomic and macroeconomic perspective, there is a need to study the topic of inflation expectations in further detail.