Inflation expectations survey of households suddenly tumbles to 9% in December quarter

Moneylife Digital Team 22 January 2015

Nomura says surprisingly oil rather than food prices have a greater effect on inflation expectations

After remaining in double-digits for over 20 quarters, the inflation expectations survey of households suddenly tumbled to 9% y-o-y (year-on-year) in Q4 2014 from 12.7% in Q3. This sharp down move partly motivated the Reserve Bank of India's (RBI) surprise inter-meeting cut. This observation is from a research note by Nomura and is shown in the chart below:

Nomura’s hypothesis has been that inflation expectations in India are primarily driven by food prices because: 1) household expenditure on food accounts for almost 50% of total consumption expenditure; and 2) foodstuffs are frequently purchased items and so should play a key role in forming expectations.

“Granger causality tests show that oil rather than food prices have a greater effect on inflation expectations – we do not find a significant cause-effect relationship between food inflation and inflation expectations, which is surprising,” says Nomura in the report.

The inflation expectations vis-à-vis CPI (consumer price index) food and crude oil prices are shown in the charts below:

The large role played by oil prices in driving expectations is understandable (it lowers the cost of production in highly energy-intensive countries like India), but Nomura finds the lower significance of food prices in driving expectations as surprising. This probably reflects the largely urban nature of the survey and suggests that the sample of respondents should be widened.

Alternative measures of inflation expectations need to be developed in India, points out the research note.

Comments

User

vishal

1 decade ago

The Government knows the inflation of food stuff will help to reduce the subsidy amount if the excise duty on oil is not hiked. But they play a spoilsport by hiking the excise duty to deprive the general public in lowering the essential edible oil prices as well food prices. Why this? I am not able to get a answer for this.