All you wanted to know about. Inflation Expectations Survey

Do you wonder why the RBI, which kept such a hawk-eyed watch on inflation, is not reacting to the recent great news on the inflation front? The consumer price index (CPI) and wholesale price index (WPI) numbers have both fallen rapidly in recent weeks. Yet the RBI isn’t cutting rates. It feels, while inflation itself is down, inflation expectations of people aren’t. How did RBI divine this? It is through its ‘inflation expectations’ survey of households. Think of it as crowd sourced intelligence on inflation.

The RBI surveys 5,000 households every quarter to know where they expect prices to head in the coming months. Data on price expectations is collected for food, non-food, housing, services, household durables and general categories of items. To put things in context, the current inflation level experienced by each person is also captured in the matrix. The expectations are subjective assessments by the individual, based on their consumption pattern. The survey has been running since September 2005.

The data serves as a lead indicator of inflation, just as the Purchasing Managers Index (PMI) serves as a lead indicator of industrial output. And just like the PMI, more than the actual number, it is the direction of inflation expectations that help predict the future.

Inflation is a huge factor that the RBI weighs before making policy decisions on interest rate changes and liquidity. However, CPI and WPI measures of inflation are lagging indicators as they measure price changes that already happened. By acting on those, the RBI will end up ‘chasing’ ground reality rather than shaping the future. So lead indicators such as inflation expectations are the key to know which way the wind is blowing. For example, the April-June quarter survey published in July showed a perceptible jump in the number of people who thought prices will fall. And so it has happened.

Also, the CPI and WPI are somewhat theoretical measures of inflation, as they are based on fixed ‘baskets’ of consumption assumed by policymakers. Given the diversity of the people in the country, inflation affects each person differently and these indices may not realistically capture its effects. The inflation expectations survey takes inputs from people with varied backgrounds to reflect different social economic and age groups. Participants are selected from 16 cities. The sample consists of housewives (30 per cent), self employed people (20 per cent), retired persons, daily workers and financial sector employees (10 per cent each), other employed people (15 per cent) and other groups (5 per cent).

For one, you may be one of the 5,000 participants picked for the survey in any quarter. The entire country’s monetary policy, which could affect foreign investors as well, may be influenced by your answer. So, hey, no stress, but knowing about the survey, you will likely put the chance to good use and provide useful responses. But more likely, the survey results offer you a gold mine of data. You can detect shifts in expectations, not just in overall numbers, but in various categories. This can help you plan your expenses, savings and maybe even the city where you want to live.

It is good to know that the powers-that-be listen to the wisdom of the crowd, when it comes to framing their policies

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