Economic policy uncertainty and inflation expectations of the households – insights from survey data

Purpose This paper aims to analyze how economic policy uncertainty (EPU) affects inflation expectations. The study uses unit-level observations of 3 months ahead and 1-year ahead inflation expectations from the Reserve Bank of India’s Inflation Expectations Household Survey (IESH) to explore the variations in consumer confidence across several cities in India. Design/methodology/approach This paper uses unit-level observations of 3 months ahead and 1 year-ahead inflation expectations of the households from the Reserve Bank of India’s IEHS between September 2008 to July 2024. It uses a fixed effects regression exercise to examine the impact of EPU on the households’ inflation expectations. Findings The study results show that EPU negatively and significantly impacts consumers’ short-term inflation expectations. Heterogenous analysis concerning gender reveals that impact of EPU on inflation expectations is higher for women than men. Further, respondents in the working-age population and greater income uncertainty are more sensitive to changes in EPU on inflation expectations. A disaggregated analysis is also conducted to analyze the impact of EPU on several disaggregated indicators of inflation expectations, showing that EPU has a larger impact on durables and house prices compared to nondurables and services. Robustness tests with alternative policy uncertainty measures and placebo tests corroborate our findings. Practical implications These findings indicate that EPU can potentially depress the household’s own price expectations related to several components of their consumption basket due to precautionary saving behavior, consequently leading to a pessimistic view of overall prices. Originality/value To the best of our knowledge, no study has explored the impact of inflation policy uncertainty on inflation expectations using unit-level survey data for an emerging economy like India. Furthermore, survey-level data allows us to examine the heterogenous impact of EPU based on household characteristics. Moreover, it also establishes the household’s own consumption basket channel through which EPU impacts the overall inflation expectations.