NO : WP-2024-018
AUTHOR : Taniya Ghosh and Abhishek Gorsi
TITLE : Inflation Expectations and Keeping Up With the Joneses
Abstract
The paper analyzes the role of personal income change and social comparisons in explaining the heterogeneity and upward bias in Indian households’ inflation expectations by using repeated cross-sectional data from the Reserve Bank of India’s bimonthly Consumer Confidence Survey and a one-time Primary survey. We find that when households experience a decline in personal income, they have higher inflation expectations, supporting the findings of Tsiaplias (2021)(Journal Applied Econometrics, 36(6), 784–807). Surprisingly, contrary to Tsiaplias (2021)(Journal Applied Econometrics, 36(6), 784–807), we also find that even with an increase in households personal income, they have higher inflation expectations. Such findings can be explained by the household’s relative position and aspirations as a result of social comparisons. As household income rises, they seek higher consumption standards in order to maintain their relative position in society. The difficulty faced to attain the higher consumption level is attributed to external factors like higher prices, thus resulting in households reporting higher inflation expectations. However, when personal income falls, the relative factors have no effect on their inflation expectations. The study thus contributes to a better understanding of the behavioral factors that influence inflation expectations, the heterogeneity in household responses, and the upward bias in inflation expectations among Indian households.
Keywords: Consumption Outlook, Income Outlook, Inflation, Inflation Expectations, Reference Group, Social Comparisons
JEL Code: E31, E71, D12
Weblink: http://www.igidr.ac.in/pdf/publication/WP-2024-018.pdf
