Impact of food inflation on headline inflation in India
VI. DISCUSSION OF RESULTS AND CONCLUSION
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| VI. DISCUSSION OF RESULTS AND CONCLUSION Results (a) The causality tests reveal the presence of the first round effects, namely the presence of causality from food inflation to headline inflation, which is expected. They also show that a significant causality from headline inflation to core inflation exists. Causality from headline inflation to core inflation implies the presence of the second round effects. Rising food inflation feeds into the headline inflation, which further feeds into core inflation because of rising inflation expectations, giving rise to an upward push to the underlying trend in inflation. As a result, the headline inflation and core inflation diverge. (b) The volatility results of the inflation measures clearly reveal that none of the inflation measures are volatile. Accordingly, food inflation in India cannot be treated as transitory. (c) Mean error and root mean square error of the inflation expectations for the given sample clearly reveals that households are overestimating future inflation as the Reserve Bank of India is failing to anchor inflation expectations. This is the reason behind the second round effects. (d) The Granger causality from the call rate to the inflation measures clearly reveals that policy is able to influence only the food inflation in the short and medium run. It influences the core inflation and headline inflation only in the long run. |