Inflation expectations of households: do they influence wage-price dynamics in India?

Abstract

This paper examines the usefulness of survey-based measures of inflation expectations to predict inflation using hybrid versions of New Keynesian Phillips Curve (NKPC). While both 3 months ahead and 1-year ahead inflation expectations of households emerge statistically significant in explaining and predicting inflation in India, effectively they work as substitutes of backward looking expectations given that household expectations are found to be largely adaptive. Unlike in other countries, this paper does not find much evidence on flattening of the Phillips curve. Also, no robust evidence is found on expectations induced wage pressures influen-cing CPI inflation