Diagnose Response Bias and Heterogeneity:A Latent Class Approach on Indian Household Inflation Expectation Survey

The main aim of this paper is to evaluate properties of the survey based households inflation expectations, conducted by the Reserve Bank of India (RBI). The results of Inflations expectation survey of households (IESH) regarding their expectations on prices for next quarter shows that there is significant heterogeneity in the responses. The heterogeneity is accounting by estimating a latent class model. Five classes of respondents are identified using attitudinal and knowledge questions. Also, latent class analysis has been hailed as a promising technique for studying the measurement errors in the response of the respondents. It is found that the respondents have given the false response to the questions of expectations on prices of non-food products and household durables.