Predictive Power of Inflation Expectations in India

Expectations about future inflation quietly shape how societies spend, save, and govern, linking households to public opinion and markets to policy decisions. Inflation expectations play a crucial role in determining actual inflation outcomes and monetary policy effectiveness. Central banks closely monitor alternative inflation expectations offering distinct insights for understanding realised inflation. This study compares predictive power of households’ and business inflation expectations for actual inflation measures in India. Business inflation expectations turned more volatile in post-pandemic period, reflecting uncertain business conditions and macroeconomic environment, while households’ expectations reflected stability in consumer perceptions, especially in post-Flexible Inflation Targeting (FIT) regime. Empirical results suggest that inflation expectations channel remains statistically significant, and households’ inflation expectations better explain variation in Consumer Price Index (CPI) inflation measures, while business expectations incline more towards Wholesale Price Index (WPI) measures. Moreover, the relevance of households’ inflation expectations has also become stronger for CPI core in recent period, indicating strengthening of the expectations channel.