Food prices matter most: Sensitive household inflation expectations

Nikoleta Anesti, Vania Esady () and Matthew Naylor
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Vania Esady: Bank of England

No 2434, Discussion Papers from Centre for Macroeconomics (CFM)

Abstract: We construct a novel dataset to investigate the sensitivity of household inflation expectations to personal experienced inflation, testing whether households weigh price changes differently across items in the consumption basket. Food prices matter significantly more for households inflation expectations dynamics than other components, including energy. In particular, households are asymmetrically sensitive to increases in food price-driven inflation, and above-median income households are more sensitive than peers. Taken together, our findings can rationalise a number of empirical regularities related to household expectations: their upwards bias relative to actual inflation; cross-sectional heterogeneity across demographic groups; and their ‘supply-side’ oriented view of the economy. Our results imply that the risk of household expectations contributing to persistent inflationary dynamics are greatest when shocks impact prices of non-core components of the basket.

Keywords: Households; inflation expectations; inflation experiences; heterogeneity; food prices (search for similar items in EconPapers)
JEL-codes: C33 D84 E31 E52 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2024-08
New Economics Papers: this item is included in nep-agr and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:cfm:wpaper:2434

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