The dramatic and sustained disinflation India has witnessed over the past three years is the most stark manifestation of the macro-economic transformation the economy has undergone. It’s also, however, the source of an important macroeconomic puzzle.
One constant in the past three years has been that actual inflation has consistently undershot expectations. Put differently, forecasts of inflation have consistently over-estimated inflation (or underestimated the disinflation) – thereby making systematic forecast errors. Consider this: Consensus CPI forecasts predicted 7.7 per cent inflation for 2014-15. The actual outturn was dramatically lower at 6 per cent. Yes, oil prices fell later that year, but that should have been offset by the drought in 2014. There were no mitigating circumstances the next year. Consensus forecasts pegged inflation at 5.4 per cent in 2015-16. Despite another drought, the actual inflation outturn was just 4.9 per cent. Again, in 2016-17, forecasts pegged inflation at 5.2 per cent. The actual outturn was materially lower at 4.5 per cent. I suspect we are on course to another undershoot this year.
via Why inflation undershot expectations | Business Standard Column
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