A price-expectations mismatch

A CONSEQUENCE OF THE GAP IS THAT THE REAL COST OF CAPITAL REMAINS STUBBORNLY HIGH IN INDIA

- SANJEEV SANYAL PARTHA PROTIM BARMAN

POLICYMAKERS AND MEDIA diligently keep track ofthe current inflation rate, but it is often forgotten that it also matters what consumers expect of future inflation.

Since the introduction of the flexible inflation targeting framework in 2016, inflation has come down structurally. However, inflation expectations have not declined commensurately.For instance, consumer price inflation fell to 0.25% year-on-year in October, but the latest Reserve Bank of India (RBI) expectations survey (September 2025) suggests that consumers think it is running at 7.4% and that it will be 8.7% ina year’s time. Even if some critics feel that statistical factors have exaggerated the dip ininflation in October, itis fair to say that consumers are far more pessimistic than warranted by data. In this article, we will explore why the gap between expectation and actual inflation has significant economic cost.

The RBI’s Inflation Expectations Survey of Households provides the best available gauge ofwhat consumers thinkabout price trends. The accompanying chart shows how expectations have moved visa-vis actual consumer price inflation. Between 2009 and 2013, inflation was high and volatile, peaking at 15% in December 2009. In response, consumer estimates of inflation as well as their expectations of future inflation rose sharply. This is to be expected, but notice that expectations remained obstinately high even as actuals declined to the 9-10% range in 2010-2013.