AN ANALYSIS OF INFLATION EXPECTATIONS AND PERCEPTIONS IN THE INDIAN CONTEXT

Abstract

Inflation expectations and perceptions play a crucial role when it comes to the effectiveness of the monetary policy of any central bank. Survey data on expectations and perceptions of households, professionals, and agents regarding inflation has increasingly become a vital part of central banks across the globe. The survey data on inflation expectations and perceptions significantly impact the effectiveness of the monetary policy at a macro level (Woodford, 2005). As inflation targeting is the main objective of monetary policy, how the households and professionals expect and perceive inflation and incorporate them in their decision-making is pertinent for the efficacy of central banks. Patra and Ray (2010) and Pattanaik et al. (2020) found a vital role of inflation expectations in conducting monetary policy and their reflection on the credibility of the central banks. They highlighted the role of anchored inflation expectations by the central banks in the effectiveness of the monetary policy. Woodford (2005) emphasized the role of communication from the central bank and the inflation expectations in the monetary policy effectiveness. Inflation expectations and perceptions have been researched over decades; however, the Euro currency changeover in 2002 was an event in history that raised the momentum of research on these concepts. Among the notable studies in recent years, Brachinger (2006, 2008) outlined a theory on “perceived inflation” and constructed an index for calculating annual perceived inflation based on official data available on price changes rather than on survey data. Ranyard et al. (2008) offered a conceptual framework that started with price changes in the economy and examined how people’s attitude in the previous period and their personal income led to the formation of perceived inflation. Along with media and word of mouth, previously held expectations regarding the current period also contributed to inflation perceptions. Furthermore, all these factors led to the development of inflation expectations, which were also influenced by economic forecasts and social amplifications. Ultimately, these perceptions and expectations about prices shaped the economic behavior of individuals in an economy. Apart from the framework mentioned above by Ranyard et al. (2008), which focuses on the formation of inflation expectations and perceptions, there is no conceptual framework that discusses the relationship of inflation expectations and perceptions with economic behavior of the households.