This article presents the findings of Inflation Expectations Survey of Households conducted in the October–December 2010 quarter, the 22^nd round in the series. The survey captures the inflation expectations of 4000 urban households across 12 cities for the next quarter (January-March 2011) and for the next year (January- December 2011).

The inflation rates from this survey represent the inflation expectations of 4000 urban households based on their individual consumption baskets and hence these rates are not to be considered as predictors of any official measure of inflation. The households’ inflation expectations provide useful directional information on near-term inflationary pressures and also supplement other economic indicators, to get a better indication of future inflation.

The survey findings indicate that households expect inflation to rise further by 60 and 130 basis points during next quarter (12.4 per cent) and next year (13.1 per cent), respectively/from the perceived current rate of 11.8 per cent. Households’ expectations of general price rise were mainly influenced by movements in food prices. The percentage of respondents expecting price rise have gone up for all the product groups (viz., General prices, food and non-food product, households durables and housing), except cost of services. On category-wise inflation expectations, Daily-wage workers and Housewives expected higher inflation rates compared to other categories. Across the cities, Bangalore registered the highest inflation expectations and Patna registered the lowest expectations.

I. Introduction

Reserve Bank of India has been conducting Inflation Expectations Survey of Households (IESH) on a quarterly basis, since September 2005. The survey elicits qualitative responses on expected price changes (general prices as well as prices of specific product groups) in the next three months as well as in the next one year and quantitative responses on current, threemonth ahead and one-year ahead inflation rates. While inflation affects purchasing power, inflation expectations affect people’s behaviour in ways that have a long-term economic impact. Inflation expectations of households are subjective assessments and are based on their individual consumption baskets and, therefore, may be different from the official inflation numbers released periodically by the government.

II. Data Coverage & Methodology

The single-page survey schedule designed for the IESH has been organised into six blocks (Annex). The first block seeks respondents’ particulars including name, contact details, gender, age and category (occupation). The second and third blocks seek productwise price expectations for three-month ahead and oneyear ahead, respectively. The fourth block assesses the respondents’ feedback on the Reserve Bank’s action to control inflation. The fifth block collects the rate of inflation of the respondent for three time points – current, three-month ahead and one-year ahead. The sixth block captures the information on the amount paid by the respondents for the purchase of major food items viz. Milk, Wheat, Wheat-Atta, Rice and Dal (per kg) during the last one month.

II. 1 Coverage

The Reserve Bank conducts this survey in 12 cities on a quarterly basis. The major metropolitan cities, viz., Delhi, Kolkata, Mumbai and Chennai are represented by 500 households each, while another eight cities, viz., Jaipur, Lucknow, Bhopal, Ahmedabad, Patna, Guwahati, Bangalore and Hyderabad are represented by 250 households each. The respondents are well-spread across the cities to provide a good geographical coverage. The male and female respondents in the group are usually in the ratio of 3:2. The category-wise representation of the respondents is presented in Table 1. The sample coverage is nearly as per the target in all rounds.

II. 2 Information Collected

The price expectations are sought for general prices and for five product groups (food products, non-food products, consumer durables, housing and services). The general price comprises prices of all the product groups taken together. The options for responses are (i) price increase more than current rate, (ii) price increase similar to current rate, (iii) price increase lower than current rate, (iv) no change in prices and (v) decline in prices. The first three of the five options pertains to the respondents’ expectations on the rate of future price increase compared to the current rate. These expectations are sought from the respondents for three-month ahead as well as one-year ahead period. The inflation expectations of the respondents that represent the year-on-year changes in prices are collected through Block 5. The inflation rates are collected in intervals – the lowest being ‘less than 1 per cent’ and the highest being ‘16 per cent and above’ with 100 basis point size for all intermediate classes. The information on the respondents’ awareness of Reserve Bank’s action to control inflation as well as the impact of Reserve Bank’s action on inflation is also obtained from the last survey round (September 2010). In the current round (December 2010), a new question was added in Block 6 to capture the information on the amount paid by the respondents for the purchase of major food items, viz., Milk, Wheat, Wheat-Atta, Rice and Dal (per kg) during the last one month.

III. Survey Results

III.1 General Price Expectations:

The survey results depict that the percentages of respondents expecting increase in general prices for both three-month ahead and one-year ahead have been rising since March 2008. For three-month ahead, the percentage of respondents who expect this price increase to be ‘higher than current rate’ was rising steadily from March 2010 to December 2010 except for the marginal dip in September 2010 (Table 2).

III. 2 Product Group-wise Price Expectations:

The product group-wise price expectations based on Block 3 of the survey schedule are given in Statement I. The percentage of respondents who expects the prices in general to go up for next three months and next one year has increased further. For three-month ahead price expectations, the percentage of respondents expecting price rise have gone up for all product groups, viz., food and non-food products and housing, except cost of services. In case of food products, the percentage of households expecting the price increase more than the current rate has moderated marginally where as the per cent of those expecting price increase similar to the current rate has increased as compared to the previous survey round (September 2010). In case of one-year ahead price expectations, the percentage of respondents expecting food price increase as well as those expecting price increase at more than current rate has increased. A similar trend is observed for non-food products as well. For household durables and housing, more respondents are expecting price to increase as compared to the previous round. There is marginal moderation in the proportion of respondents expecting price increase in cost of services for three-month ahead; however, the same is expected to increase for the next one year.

III. 3 Coherence between General Prices and Product Groups’ Prices:

General Price expectations are determined by the price expectations in totality of various product groups. It can be observed that price expectations of certain product groups greatly influence the General Price expectations than other products. Therefore, a measure of coherence between General Prices and prices of various product groups was derived based on the total percentages of respondents who expect similar movements in General Price and those of various product groups. This degree of coherence between General Prices and prices of various product groups for three-month ahead and one-year ahead is depicted in Table 3 and Table 4.

The General Price expectations are more in tune with food price expectations, as compared to other product groups. This association was lowest for household durables. This indicates that respondents assign relatively higher priority to food prices when they think about the price movements in general. In the current round of the survey, about 92 per cent of the respondents are seen to have been influenced by food prices for arriving at three-month ahead and oneyear ahead general inflation expectations. It is observed that there has been an increase in the share of respondents who felt that housing has been an influencing factor for setting their general price expectations for three-month and one-year ahead.

III. 4 Inflation Expectations

The inflation expectations are collected through quantitative Block 5 of the survey schedule. The perception of current inflation rate and expectations of three-month ahead and one-year ahead inflation since Round 5 (September 2006) are shown in Table 5 and Chart 1. It represents the average inflation rate of 4000 respondents. The movement of inflation expectations shows that the future inflation expectations are usually higher than the perception of current inflation. In the current round of the survey, the average rates of inflation for current, three-month ahead and one-year ahead are 11.8 per cent, 12.4 per cent and 13.1 per cent, respectively. While the perception of current inflation moderated marginally, the three-month ahead and one-year ahead inflation expectations have increased by 10 and 40 basis points, respectively/as compared to the inflation expectations in the previous round (September 2010). The inflation expectations in the current survey round have been marginally lower than the peak rates observed in September 2008. These inflation expectations provide useful inputs on directional movements of future inflation. However, these are not to be treated as forecast of any official measure of inflation.

It may be seen from Chart 1 that the short-term (three-month ahead) expectations of inflation lie between current and long-term (one-year ahead) inflation.

Chart 2 depicts the household inflation expectations along with the official inflation measures based on Wholesale Price Index (WPI) – All commodities and Consumer Price Index for Industrial Workers (CPI-IW). It shows that for a large part of the survey history, the households’ inflation expectations remained between the WPI and CPI-IW inflations. However, in the current survey round, household inflation expectations are higher than the official inflation rates. It can be seen that even though the official indicators are moving in the downward direction, expectations are showing an upward swing.

III. 5 Volatility in Responses

The volatility in responses is measured through standard deviation. Over different rounds, the standard deviation has been lower for current inflation rate as compared to three-month ahead and one-year ahead (Table 6).

The total variability in responses for inflation expectations was elucidated by different classificatory factors, (viz., Gender, Age-group, City and Category) of respondents over different rounds. An Analysis of Variance (ANOVA ) carried out over different rounds revealed that ‘City’ has been a significant source of variation in all rounds (Table 7). This may be due to variation in consumption baskets across the cities.

III.6 Gender-wise Inflation

In the current round of survey, female respondents expected higher inflation rates as compared to their male counterparts (Table 8). However, there is no significant difference between male and female respondents in terms of the consistency in responses over various survey rounds and for current, three-month ahead and one-year ahead periods.

III.7 Category-wise Inflation

The category of respondents indicates their occupation status. For the latest survey round, Daily Workers and Housewives reported higher inflation expectations, whereas Financial Sector Employees reported the lowest inflation rates (Table 9).

III.8 Age Group-wise Inflation

The survey covers only the adult respondents of 18 years or more. During the current survey round, the respondents in the age group ‘60 years and above’ have reported the highest inflation rates for current and three-month ahead periods (Table 10). The one-year ahead inflation expectations were higher for the age-groups ‘35-40 years’ and ‘40- 45 years’. However, over the survey rounds, no agespecific consistency is observed in inflation expectations.

III.9 City-wise Inflation

Significant variations were observed in the inflation expectations across different cities, which may be attributed to the divergence in consumption pattern between cities. In the latest round of survey, inflation expectations were found highest in Bangalore and lowest in Patna (Table 11). The variability in responses was highest in Hyderabad and lowest in Bhopal.

III.10 Cross-Tabulation of Current and Future Inflations

It may be observed that 74.3 per cent respondents perceived double digit current inflation. Similarly, 80.9 per cent and 81.5 per cent of the respondents expected the three-month ahead inflation and one-year ahead inflation in double digit figures, respectively. A crosstabulation of the current inflation perception with the future inflation expectations points out that among the respondents who perceived the current inflation in double digit, 97.0 and 95.6 per cent respondents expected that it would remain in the same band for three-month ahead and one-year ahead, respectively (Table 12 & Table 13).

III.11 Awareness of Reserve Bank of India’s Action to Control Inflation

An additional block (Block 4) was added to the survey schedule from the previous survey round (September 2010) to determine the awareness of public of the Reserve Bank’s action on inflation control. Out of the two questions in this block, the first one elicits the respondent’s awareness whether the Reserve Bank is taking necessary actions on controlling inflation whereas the second one determines whether the respondent thinks that the Reserve Bank’s action has got any impact on inflation. The responses for the latest survey round are presented in Chart 3. It can be seen that 36 per cent of the respondents felt that the Reserve Bank is taking necessary action to control inflation. Out of these 36 per cent respondents, 70 per cent are aware that the Reserve Bank’s action has got an impact on inflation.

The category-wise distribution of the responses based on ‘Block 4’ points out that the awareness of both the Reserve Bank’s action on inflation control as well as its impact was the highest among Financial Sector Employees and it was least in case of Daily Workers and Housewives (Chart 4).

The category-wise distribution of the responses of ‘the impact of the Reserve Bank’s action on inflation control’ for the 36 per cent respondents who felt that the Reserve Bank is taking necessary action to control inflation is depicted in Table 14.

IV. A Bootstrap Confidence Interval for Inflation Expectations

In the previous sections, the average rates of inflation expectations are presented. Using the Bootstrap-resampling method, interval estimates of the average inflation expectations of households are presented, so as to give a clearer picture of the error associated with the estimates of households’ inflation expectations.

The Bootstrap is a re-sampling method for statistical inference, wherein the sampling distribution of a statistic can be obtained without specific knowledge of the exact distribution of the population variable under study. It is commonly used to estimate confidence intervals. Through Bootstrapping, a confidence interval of not only population mean but also the population median and other parameters can be obtained.

Drawing 10,000 resamples using Simple Random Sampling With Replacement (SRSWR) from the sample of the survey, 99 per cent Bootstrap Confidence Intervals (BCI) for mean were obtained. The results are presented in Table 15. It is observed that the exercise leads to a confidence interval with a small width indicating that the point estimates are quite precise for estimating the population means of households’ expectations of inflation.