Inflation expectations: Whose perceptions are these anyway?

What households and businesses foresee often differs from what India's retail gauge reveals but should this influence policy?

- MADAN SABNAVIS

Economists often talk of 'inflationary expectations' and one may be left wondering what these mean. In essence, the argument goes that present inflation is not relevant as this has already been witnessed. What is important is future inflation, which is why expectations of price levels matter.

Rising crude oil prices, for example, portend higher general inflation ahead. A possible El Niño weather phenomenon this year can influence inflation expectations for the second half of this year as there could be deficient monsoon rainfall, which could cause food prices to rise. These expectations tend to feed decisions taken by consumers and producers, turning rising prices into a kind of self-fulfilling prophecy and affecting the economy. But does it really work this way?

In India, an anomaly emerges when the inflation rate based on the consumer price index (CPI) is juxtaposed with the inflationary expectations and perceptions of households captured by the Reserve Bank of India (RBI) in surveys conducted on a bimonthly basis. For 2025-26, for example, there were six surveys carried out, with responses for inflation up to March 2026. Besides perceptions on prevalent inflation, forward expectations are also sought from respondents. Interestingly, household perceptions tend to be significantly higher than actual inflation.