How Food Prices Shape Inflation Expectations and the Monetary Policy Response

Dario Bonciani, Riccardo M. Masolo and Sara Sarpietro

No def135, DISCE - Working Papers del Dipartimento di Economia e Finanza from Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE)

Abstract: We show that food price changes have a persistent impact on UK consumers’ inflation expectations. Over 60% of households report that their inflation perceptions are heavily influenced by food prices and display a stronger association between their inflation expectations and perceptions. In other words, households emphasising the importance of food prices tend to have more backward-looking inflation expectations. We complement this finding with a Structural Vector Autoregression (SVAR) analysis, illustrating that food price shocks have a larger and more persistent effect on expectations compared to a “representative” inflation shock. Finally, we augment the canonical New-Keynesian model with behavioural expectations that capture our empirical findings and show that monetary policy should respond more aggressively to food price shocks.

Keywords: Inflation Expectations; Inflation Perceptions; Monetary Policy. (search for similar items in EconPapers)
JEL-codes: D10 D84 E31 E52 E58 E61 (search for similar items in EconPapers)
Pages: 54
Date: 2024-10
New Economics Papers: this item is included in nep-agr and nep-mon
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Citations: View citations in EconPapers (1)

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Working Paper: How food prices shape inflation expectations and the monetary policy response (2024)
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