RBI seems to have managed household expectations well

The Reserve Bank seems to have done well in managing Indians' inflation expectations even as supply side measures have failed to rein in food and vegetable inflation. The July 2023 round of its bi-monthly inflation expectations survey of households indicates that inflation may have peaked as they expect a moderation in inflation both over a three month horizon and a one year horizon.

Even as the surge in tomato , other vegetable and cereal prices have started pinching hard on the household pockets, they are optimistic about the future. Their inflation expectations of both three months ahead and one year ahead median inflation rate moderated sequentially by 10 bps each to 10.0 per cent and 10.3 per cent, respectively. Their perception of current median inflation inched up by 10 bps sequentially to 8.9 per cent in the latest round of the survey which covered over 6000 respondents across 19 cities .

General inflation expectation remained elevated in anticipation of firmer food prices over the next three months even as a lower share of respondents expected rise in inflation for other product groups. The Reserve Bank which is mandated to maintain stable prices within a range of 2-6 percent which it does using a variety of instruments, primarily by tinkering with the repo rate has kept the rate unchanged at 6.5 percent for three consecutive policies now. Consumer price inflation which it tracks has remained within the target band since March this year. But the July spike in vegetable and cereal prices is expected to push up inflation figures again.

Economists on the other hand have been cautious about the spiraling food price feeding into the general price levels. “Further risks to inflation outlook could emerge from - uneven distribution of Southwest monsoon, back loaded impact of El Nino in the season possibly on crop yields along with recent hardening of global commodity prices” said a report by think tank QuantEco Research.

But when it comes to housing inflation where official numbers do not seem to have captured the rising rentals ( Housing inflation has remained less than 5 percent for about four years now), the Indian household is being wary of housing inflation. The percentage of households expecting the housing prices to go up- 86.8 percent - over the one year horizon is higher than the percentage of households expecting the food prices to go up, 84.7 percent.