Households’ median inflation perceptions for the current period increased by 20 basis points, reaching 10.4 per cent in November 2021, while three months and one year ahead median inflation expectations increased by 150 and 170 basis points, respectively to 12.3 per cent and 12.6 per cent respectively, from the previous survey round.
Market economists too see sustained high prices impacting household expectations on future inflation. “We do not see the inflation trajectory to be as benign and expect inflation prints to surprise on the upside and average at 5.6% for FY22, driven by elevated input and fuel costs and as the base effect wanes off” said Abheek Barua chief economist at HDFC bank.” The risk of prolonged elevated core inflation feeding into household expectations and becoming more entrenched in the system remains”.
The Reserve Bank has chosen to underplay inflation concerns in its latest policy statement even as market expects it to inch towards the upper band of the target if 4-6 per cent. For the MPC, the recent fall in crude oil prices and cuts in excise duties on petrol and diesel is expected to ease some pressure on inflation. Besides, addressing the evolving risks from the Omicron variant to growth-inflation dynamics is a policy priority. As a result, it kept benchmark repo rate unchanged at 4 per cent and also the reverse repo rate was unchanged at 3.35 per cent.
But although prices of crude oil, metals and costs of shipping have moderated over the past month, they remain significantly higher than last year. This, coupled with supply disruptions such as semiconductor shortages, has maintained pressure on producer margins. “A pass-through of input-cost pressures to consumers, which was already happening in the past months, is likely to continue as domestic demand improves further” said Dharmakirti Joshi, chief economist at ratings firm Crisil.
Against this backdrop, the growth inflation-trade off could be tough and household could turn more cautious. “The RBI may not have leeway to stand pat in the coming months, given two imminent risks: of persisting inflation, and the United States withdrawing monetary policy stimulus sooner than previously expected”