Anchoring of inflation expectations
Also called: Anchored expectations · Topic: Inflation and Index Numbers: CPI, WPI, IIP and the Deflator · NCERT: Beyond NCERT
Meaning
Inflation expectations are what households, firms and markets believe future inflation will be. Anchoring means keeping these beliefs steady around the central bank's target through credible monetary policy. Once expectations are anchored, a one-off shock does not set off a wage-price spiral. In that spiral, workers ask for higher wages and firms raise prices early, and expected inflation turns into real inflation. The RBI tracks expectations through its Inflation Expectations Survey of Households.
Example
India's target is 4% CPI-C inflation, with a band of 2–6%. It was recommended by the Urjit Patel Committee (2014) and given legal backing by the RBI Act amendment (2016). Because expectations are meant to stay anchored at 4%, the RBI may "look through" a short vegetable price spike. It acts early against shocks that threaten to persist.
Don't confuse with
- Inflation targeting: this is the policy framework that sets the target. Anchoring is the result it aims for.
Related concepts
- Demand-pull inflation
- Output gap
- Cost-push inflation
- Supply shock
- Imported inflation
- Wage-price spiral
- Greedflation
- Structural inflation
- Inflation expectations