Viral Acharya and the pav-bhaji index of inflation

October 16, 2020 18:31

There are many things that Dr Viral Acharya discloses as he and Mercatus Senior Research Fellow Shruti Rajagopalan discuss Indian monetary policy, the banking system and reforming the financial sector, in the Ideas of India podcast, but the bit that caught our attention was where he talks about "pav-bhaji' index of inflation.

The former deputy governor of Reserve Bank of India, who is currently the C V Starr Professor of Economics in the Department of Finance at New York University Stern School of Business, tells Rajagopalan while discussing inflation, "I would say on the inflation front, the challenges are somewhat muted in my view because I think in its wisdom, the inflation-targeting framework is based on a consumer price index, and in my view, it's good that it puts a significant weight on food because what you find is that in India, food inflation has a tendency to generalize into other forms of inflation because it affects household inflation expectations in a very, very significant way. A series of papers at the Reserve Bank have shown that food and fuel are very important components in affecting inflation expectations in India."

And then he goes on to say: "I used to check with my mom every month when I was in India as to what were the -- I call it the "Pav bhaji" index. What is the cost of the peas, onions, tomatoes and potatoes, mainly the last three -- tomatoes, potatoes and onions -- because they are very volatile, but they do shape what the average person in India thinks, as we call it, monghavaaree [dearness] in the food in the Indian languages. That affects inflation expectations in a very significant way.

"It's also a way of ensuring that the monetary policy decision is not skewed towards the urban economy entirely, that food, which is a very big part of the consumption basket of the poor, actually also gets an important weight in the decision-making of the central bank."

You can read the transcript of the podcast, here.

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