Managing Expectations

Households focus on headline inflation

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The consumer price index-based inflation rate in June declined to 2.1 per cent, considerably below the Reserve Bank of India's (RBI's) legally mandated target of 4 per cent. Anticipating a decline in the inflation rate, the Monetary Policy Committee (MPC) in its June meeting decided to frontload the policy intervention and reduced the policy repo rate by 50 basis points to 5.5 per cent. Several economists are of the view that the inflation rate will remain soft in the coming months and are debating whether the MPC should further reduce the policy rate.

From a policy perspective, while it is important what economists and professional forecasters think, central bankers pay considerable attention to household inflation expectations as well. A new research article by RBI economists, published in its latest Monthly Bulletin, tracks household inflation expectations and emerging trends. Some of its findings are worth discussing here.