The media has power. Before 17 July, inflation data, compiled and ready on Thursday, was first given to senior government officials and released to the public the next day. Numerous leaks to the press in the past few months have forced the hand of the bureaucrats. The inflation data is now released at once. Is it significantly important to get the inflation number a day earlier? Does the media always play a helpful role? The answers are not crystal clear.
One of the main pillars of standard macroeconomic theory is the assumption that all economic agents (firms, consumers) are fully informed and that information is available to all instantaneously, effortlessly and without any costs. Clearly, it is here that the news media is crucial in ensuring access to information for all. Under this framework, inflation expectations are one of the key determinants of future inflation rates, as workers push for wage raises and firms push price increases when they expect higher inflation ahead. (There is, of course, the important issue about the nature of the labour markets and industry structure—whether such increases can be forced in practice—but that is often disregarded). More importantly, standard theory throws no light on how inflation expectations are generated in the real world, as it rests on the unrealistic assumption that all agents have access to all the latest relevant information and have identical beliefs about the future. This does not hold up in reality. Consumers cannot be expected to make their own analysis and forecasts; they obviously take their cues from what is happening in their household budgets, from talking to their friends, colleagues etc.—and from news and reports in the media.
Illustration: Jayachandran / Mint
New approaches in macroeconomics, therefore, allow not only for agents to have different views (what is called heterogeneous expectations), but also for variation in the extent to which different households absorb macroeconomic news. Christopher Carroll of Johns Hopkins University has an epidemiological model in which a small group of agents (professional forecasters) formulate the expectations, which then spread via the news media through the population, in the same way as a disease spreads from a common source. There are actually three channels by which inflation expectations are influenced by the media. First, as mentioned before, consumers get access to the latest economic data and the opinions of professionals. Second, as Carroll’s model shows, the greater the volume of news of the economy, the greater the probability that consumers will update their views and align with the professional view. Third, the tone or content of reporting influences public sentiment. Empirical research by Michael Lamla and Sarah Rupprecht uses data from Germany to show that both the quantity and quality of news reports influence consumer inflation expectations. There is a negative side to this too. Their study shows that media bias exists, especially in times of rising inflation, when negative news is exaggerated relative to positive ones.
Expectations are most important in the fight for price stability and again, according to standard theory, inflation expectations are assumed to be well anchored. That is, the public has a firm view of the long-run inflation rate and, therefore, will not change long-run expectations in response to new information. In other words, a short period of higher- than-expected inflation data should not change the long-run expectation of the public. However, in reality, of course, inflation expectations are imperfectly anchored and there is sufficient empirical work to support this observation.
There is a renewed focus on anchoring expectations of inflation, as Y.V. Reddy said in Manchester recently, the “most urgent and short-term priority for central bankers at the current juncture seems to be to calm the nerves about inflation or to anchor inflation expectations, with an implicit recognition that a somewhat elevated headline inflation in the short term may be difficult to avoid”. So, currently we have a situation where expectations are imperfectly anchored, are very susceptible to new information, and monetary policy is being challenged with keeping a rein on these expectations.
Though there is still a long way to go before this beast of inflation expectations is well understood, leave alone tamed, it is quite clear that the media has a significant role to play in influencing public opinion. Balance and objectivity in media reports can, therefore, be critical in the current times. Which brings us back to the point made at the beginning —should there really be such a fuss every week over the inflation data? A few months back, when journalists on a Thursday asked P. Chidamabaram about rising inflation, he reportedly said, “Thank God, it’s not Friday.” In fact, S. Narayan was spot on in his article in this paper (Mint, 6 July) when he said that he didn’t know of any other country that “whips itself every Friday”.
Hyperventilating over a weekly number that is acknowledged to be defective can hardly be of any use to anyone.
Sumita Kale is chief economist of Indicus Analytics. Comment at email@example.com