Household inflation expectations are maturing in India

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Feb 16, 2024

QuantEco Research || India MACRO Tidings - Are inflation expectations maturing in India?

Historically, food and fuel inflation (i.e., non-core) in India, display a high correlation with household inflation expectations (over a period of 2012-2024, with a lag of 1 period), along with Clothing & footwear and Miscellaneous goods and services. The dynamics appears to have undergone a shift, if we look at a more recent period of 2019 onwards. We find evidence of household inflation expectations maturing in India, with: Correlation of non-core inflation with inflation expectations witnessing a sizeable moderation. Granular analysis indicates that this has been driven by food inflation single-handedly (and not fuel inflation which has seen a rise in correlation) and  Clothing & footwear and Miscellaneous maintaining the high correlation; Correlation of Pan, tobacco and intoxicants turning even more paltry and Housing inflation correlation swinging into negative (from positive over the longer period).

 

The changing dynamics of inflation expectations, could be another reason, at the margin for RBI to remain in a state of an extended pause.