Letters: Inflation expectations

Drivers factoring in realised inflation are combination of structural, tertiary and cyclical factors

Sajjid Chinoy’s column, “Why inflation undershot expectations” (May 30), succinctly captures four important factors —food items, output level, commodity market and rupee appreciation — behind the “systematic forecast errors” of inflation expectations. 

Predictive ability of forecasting inflation could be erroneous as the gap between the estimated figures and realised rates is getting wider. Volatile macroeconomic factors coupled with “fear of uncertainty” undershot the “adaptive” expectations of price level.

An earlier article in this paper, “Understanding the inflation hawks” (May 18) by Sonal Varma and Neha Saraf, also examines a few drivers pushing up or down Consumer Price Index (CPI) inflation. There is commonality: Drivers factoring in “realised” inflation are a combination of structural, tertiary and cyclical factors.

For example, pulses and vegetables prices are likely to have a downward push to farm gate prices or Wholesale Price Index inflation; that has been transmitted to CPI inflation at retail points. A year-on-year basis change of the headline CPI inflation shows that pulse supply has negative impact on CPI inflation, while minimum support price of essential commodities and oil (gasoline/diesel) price hike provide 0.2 and 0.4 per cent push to retail inflation, respectively.

Further, pre- and post-demonetisation effects on perishable goods and cash-intensive purchase need to be taken into account to gauge their impact on inflation and consumer purchasing power. Also, stark decline in bank credit growth and large inventories of construction houses are likely to pull inflation down; it further weakens rural consumer income growth and demand for investment.

Kushankur Dey   Bhubaneswar

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