Inflation expectations of Indian households: A Better way to measure, and behavioral consequences

The causes and consequences of Indian households' Inflation Expectations (IE) are investigated using an ad-hoc survey covering 1010 urban households across Delhi, Mumbai, Chennai and Kolkata. This paper verifies the reason for upward bias in the IE of households by collecting their item-wise IE an approach not previously employed in Indian surveys and proposes an alternate method to derive an overall IE with less bias. A significant reduction in the overall IE of households and the disagreement among them was observed when it is calculated as a weighted average of their item-wise IE. Policymakers may adopt this approach as the weighted average of item-level expectations yields a more representative and less biased IE of households. The reduction was more noticeable among women, as well as individuals with lower income and less education. The investigation on the behavior of respondents anticipating higher future inflation found that most households plan to seek higher income, stockpile non-perishable essential goods, and draw down their savings actions that are likely to increase both current inflation and inflation in the near future. Effective expectations management through clear, credible, and forward-looking communication is vital to anchor inflation and ensure macroeconomic stability.