Households Bracing for Higher Inflation

CEIC India Data Talk - December 4, 2013: Households in India expect inflation to accelerate, according to the Inflation Expectations Survey of Households (IESH) conducted in the third quarter of 2013 by the Reserve Bank of India (RBI, the central bank). The latest quarterly survey, which covered 4,765 urban households in 16 cities, revealed that families expect prices to climb from an average pace of 11.8% year-on-year (Y-o-Y) in the quarter ending September 2013 to 12.8% in three months and 13.5% within a year. September's result marks the sixteenth consecutive double-digit average inflation expectation since December 2009. Furthermore, about 77% and 80% of respondents expected double-digit inflation rates three-month ahead and one-year ahead, respectively (compared to 65% and 73% for the quarter ended June 2013). The stubbornly high inflation observed in recent months may have fuelled these expectations. Indeed, the benchmark inflation rate, the wholesale price index (WPI), rose to an eight-month high of 7% Y-o-Y in October – exceeding the RBI's comfort level of 5% for the fourth-consecutive month. Similarly, consumer price inflation hit 10.09% Y-o-Y in October due to dearer food prices and a weak rupee – which in turn stoked up import costs. This has led the new RBI governor Raghuram Rajan to raise the Repo rate twice since he took office in September; to 7.75% in October 2013 from 7.50% in September and 7.25% in August 2013. Notwithstanding the RBI's continuous effort in combating inflation, the survey showed that only 32.7% of the respondents were aware of the RBI's actions, a significant drop from 55.1% in the quarter ended June 2013 Meanwhile, less than one fourth of the respondents believed the policies prescribed would quell inflationary pressure. In particular, 27.8% of financial sector employees felt the impact of the RBI's measures, where such views were only shared by 12.4% of all the workers surveyed. Across India, heightened inflation expectations at the national level were largely reflected across its various major cities. Inflation expectations for the coming quarter rose to 12.2% in Delhi (based on the survey for the quarter ended September 2013) from 11.6% during the previous quarter. However, three outliers stood out – inflation expectations eased significantly in Bangalore, Guwahati and Mumbai. Inflation expectations eased to 9.2% (from 14.2%), 13.0% (from 15.4%) and 12.3% (from 14.9%) for those three cities respectively over the same period. Despite tepid economic growth, anchoring inflation expectations proves to be an extremely challenging task for the central bank in India. The recent buildup of inflationary pressures, most notably in food and vegetable prices, is likely to be a consequence of supply-side bottlenecks which are not likely to be resolved by monetary policies but structural reforms. By Yan Ting Hin - CEIC Analyst Discuss this post and many other topics in our LinkedIn Group (you must be a LinkedIn member to participate). Request a Free Trial Subscription. Back to Blog
4th December 2013 Households Bracing for Higher Inflation

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