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Indian households expect prices to keep rising over next year

Indian households expect prices to keep rising over next year
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First Published: Thu, Aug 11 2011. 08 47 PM IST
Updated: Thu, Aug 11 2011. 08 47 PM IST
Mumbai: Indian households expect inflation to remain at an elevated level in the coming one year, according to a quarterly survey by the Reserve Bank of India (RBI).
Inflationary expectations as well as actual inflation expressed through data are two key components in the formulation of monetary policy.
Central banks seek to anchor inflationary expectations. If inflation is perceived to be accelerating, people demand higher wages and this leads to higher purchasing power, which leads to actual inflation.
A rate increase boosts borrowing costs and thus reins in demand for goods, bringing down inflation.
RBI said in its first-quarter monetary policy that moderation in growth as a result of the monetary stance will be “limited by the overall buoyancy in consumption, in part an outcome of overall increases in real wages.” The persistence of high inflation, RBI reckoned, is also because producers are “able to pass on rising commodity input prices and wage costs to consumers.”
The survey, which was conducted across 4,000 households in 12 major cities, doesn’t see a sharp spike in inflation from the present level, thanks to the already high prices prevailing in the economy.
The expectation that prices will inevitably rise is shared by a large majority—data since March 2009 show that more than 90% of respondents have felt prices were going to rise.
The 24th round of this survey, conducted in the April-June quarter, showed that 98.7% of respondents feel prices are heading northward in the coming three months as well as in the next 12 months.
However, there is a marginal moderation in perception if the rate of increase in prices is greater than the current rate. Among 4,000 urban households, 71.8% think that the price rise in the next three months will be more than the current rate of inflation. However, in a one-year horizon, 73.3% say the rise will be faster than what it is now.
In the March quarter survey, the figures were 72.9% and 73.4%, respectively.
The perception of an overall price rise seems to have been influenced by a rise in food prices.
“In the current round of the survey, about 88.5% and 94.8% of the respondents are seen to have been influenced by changes in food prices for arriving at three-month ahead and one-year ahead general price expectations respectively,” the survey found.
The index of inflation measuring wholesale prices of farm products including rice, wheat and lentils rose 9.9% in July, the highest in three months, data released by the government showed on Thursday.
To control inflation, RBI has hiked its policy rate 11 times since March 2010, from 3.25% to 8%. The central bank expects wholesale-price inflation to come down to 7% by March.
Most economists expect RBI to raise rates in its September mid-quarter policy by at least 25 basis points to control inflation, although the recent global turmoil may cause a rethink. One basis point is a hundredth of a percentage point.
The survey was conducted before markets slumped worldwide. It shows that there has been a shift in inflation expectations.
“The current round of the survey shows that the three-month-ahead inflation expectations of households have tended to be slightly lower at 11.8% from 11.9% in the last round of survey but one-year ahead inflation expectations have moved slightly higher at 12.9% from 12.7%,” it said.
For a large part of the survey’s history, RBI said households’ inflation expectations have remained below the prevailing inflation rate.
“However, from (the) September 2010 round of the survey, household inflation expectations are higher than the official inflation rates. In the current round also, the same trend has been observed,” it said.
In fact, 43% of the respondents have “no idea” whether RBI is taking necessary action to control inflation. Out of the 57% who are aware of RBI’s role in controlling prices, only a quarter felt that central bank action is necessary. Of these, only half felt that the Reserve Bank’s action has an impact on inflation.
In essence, out of the 4,000 respondents, only 510 felt RBI’s actions are having some effect on controlling prices.
The survey was published as a part of RBI’s monthly bulletin for August 2011 and is not an official endorsement by it.
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First Published: Thu, Aug 11 2011. 08 47 PM IST