Households expect non-food and food inflation to rise in tandem, see faster rise

Food inflation expectations are correlated with other non-food items, services and durable goods

India’s inflation dipped to a 59-month low of 3.5 percent in July compared to 5.1 percent in the previous month. While falling inflation should have provided some succour to households, in a survey conducted to measure inflation expectations between July 2 and 11, a higher number of households expected prices faster than the current rate of inflation.

The number of households expecting prices to rise crossed 90 percent for the first time since May 2023, while households expecting prices to rise faster than the current rate at 68.6 percent was highest in a year.

A large reason for this growing pessimism, despite experts indicating an easing of inflation starting the second quarter, may be the sequential rise in prices, especially those of food.

Despite overall inflation declining to 3.5 percent over the month, prices were 1.4 percent higher across the consumer basket. Food prices rose 2.8 percent, with tomatoes going up 41 percent and onion prices rising 20 percent within a month.

In fact, in his press conference post the monetary policy committee meeting on August 9, where interest rates were held  at the same level for the ninth straight time, RBI governor Shaktikanta Das highlighted the primacy of food inflation.

“With this high share of food (46 percent) in the consumption basket, food inflation pressures cannot be ignored. Further, the public at large understands inflation more in terms of food inflation than the other components of headline inflation,” he noted.

A Moneycontrol analysis shows that this is indeed the case when it comes to food inflation.

Although core inflation (excluding food and fuel) has fallen consistently over the past 18 months, in 10 of the inflation expectations surveys conducted during this period—they are bimonthly exercises— the non-food items and food items' trajectory was correlated 80 percent of the times.

So, if households have expected prices of food items to increase, they expect non-food items to also rise. In the survey in May, households expected both food and non-food items to rise, despite core inflation consistently declining during this period.

Not just food, the trajectory between services is also as correlated to food as that of non-food products.

In fact, housing prices also do not tend to differ from the basic trajectory of inflation in other items.

Since January 2023, the two have diverged just once, that too in July when households expected food prices to rise but housing inflation to decline over the course of the next one year.

Is the relationship stronger than ever?

A longer-term analysis shows a changing relationship in expectations in more recent times. The relationship may not be as strong over the last five years, as it was over the past 15.

Since 2018, expectations on food, non-food and service prices have moved in the same direction 74.4 percent of the time. The relationship has been stronger over the long term.

Between 2008 and now, expectations were moving in the same direction 81.3 percent of the time.

Experts indicate that as incomes increase, the share of food in consumption is expected to decline, which means that expectations in relation to food volatility may also reduce.