Are Indian inflation expectations anchored?

Keeping inflation expectations anchored has been a prominent part of the RBI’s public description of its inflation-fighting strategy. But what exactly does that mean? Expectations of short-term inflation have certainly gone up, as reflected in the relatively new survey of professional forecasters. But long-term inflation expectations are not too high. The median forecast for the five-year average inflation rate is 6 percent (see my last post for the link), and the ten-year average median forecast is only 5 percent (WPI) or 5.4 percent (CPI). These numbers are near the top of the RBI’s target range, but are not really high.

A definitive answer to the question in my title, however, cannot be given for India, I think, so the RBI has to guess. A recent San Francisco Federal Reserve Letter by Wayne Huang and Bharat Trehan points out that the way to see if inflation expectations are anchored is to test if the process generating such expectations is stable or has changed. For the US, their answer is “no.” For India, we just don’t have enough data yet. But at least we should know what we don’t know.

The SF Fed Letter is at

http://www.frbsf.org/publications/economics/letter/2008/el2008-23.html

2 Responses to "Are Indian inflation expectations anchored?"

  1. Mohit Satyanand   August 11, 2008 at 10:07 am

    Nirvi,While I appreciate the formal nature of your query, I ran an informal questionnaire by residents of my mountain village this May. Their take on inflation over the prior 12 months ranged from 15% to 25%Mohit

  2. Nirvikar Singh   August 11, 2008 at 12:55 pm

    Well, maybe that goes back to the issue of what is the right measure of inflation for India — another thorny question that has not been tackled by policymakers