Why does RBI’s household survey see retail inflation as remaining elevated?

Inflation expectation of households has risen by 10 bps from 10.4 per cent in November to 10.5 per cent in January for the three-month ahead period, the RBI survey says. As many as 84.3 per cent of the people surveyed expected the prices to increase in the next three months and 60.8 per cent of people expected the prices to rise more than the current rate.

Further, 84.6 per cent of the people expect food prices to rise in the next three months. In short, households don’t expect any respite from high prices in the next three months. They expect food, non-food, household durables and housing to rise in the next three months.

One-year ahead inflation to stay high:

Households’ one-year ahead inflation expectations remained unchanged at 10.8 per cent from the November 2022 round of the survey. In this case, as many as 91.6 per cent of the people surveyed expected the prices to increase in the next three months and 70.8 per cent of people expected the prices to rise more than the current rate. Further, 88 per cent of the people expect food prices to rise in the next three months.

What is the RBI policy forecast?

The Monetary Policy Committee (MPC) of the RBI has projected retail inflation at 6.5 per cent in fiscal 2022-23. For FY2024, CPI inflation is projected at 5.3 per cent. After a peak of 7.8 per cent in April 2022, the CPI inflation moved below the upper tolerance level of 6 per cent during November-December 2022, driven by a strong decline in the prices of vegetables. The RBI has hiked the repo rate by 250 bps, including the 25 bps hike on February 8, in the current cycle to rein in inflation.

The RBI’s medium-term target for consumer price index inflation is 4 per cent within a band of +/- 2 per cent, while supporting growth.

Inflation pinches:

Among consumption categories, the proportion of respondents perceiving price rise was highest for the food group for both the horizons, as also witnessed in the previous two survey rounds, the RBI survey says.

Respondents expect higher price pressures for household durables and the cost of housing over the next three months, when compared to the previous survey round. City-wise, the range of inflation expectations was 7.4-12.8 per cent over the three-month horizon and 8.3-13.3 per cent over one-year horizon, according to the RBI survey.

What do experts say?

Analysts say the inflation level of 6.52 per cent in January is higher than their expectations and is worrisome. Sequentially, inflation has snapped a two-month contractionary streak as food inflation and core inflation remained firm.

“Going forward, sticky core inflation will remain a concern. However, broadly we expect the average CPI inflation to moderate to 5.1 per cent in FY24 on the back of softening prices of cereals and pulses,” said Rajani Sinha, Chief Economist, Care Ratings. The monetary policy tightening so far, and some fizzling of pent-up demand should also help ease CPI inflation.

“From the policy perspective, we believe that further rate hikes are unlikely. However, we need to be cautious as the RBI has left the window open for the possibility of another rate hike in case of a sustained rise in inflation,” he said.