Food prices matter most: sensitive household inflation expectations

Nikoleta Anesti (), Vania Esady () and Matthew Naylor ()
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Nikoleta Anesti: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH
Vania Esady: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH
Matthew Naylor: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH

No 1125, Bank of England working papers from Bank of England

Abstract: We construct a novel data set 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. Across households of all age, income, gender, work status, UK region, and house tenure groups, food prices matter significantly more for inflation expectations dynamics than other components, including energy. In particular, households’ expectations are sensitive to changes in food price-driven inflation at short, medium and long horizons, and this association is persistent, non-linear and asymmetric. Our results imply that the risk of household expectations contributing to persistent inflationary dynamics are greatest following large and inflationary shocks to, specifically, food prices. Moreover, 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.

Keywords: Households; inflation expectations; inflation experiences; food prices; heterogeneity; persistence; non-linearities; asymmetries (search for similar items in EconPapers)
JEL-codes: C33 D84 E31 E52 (search for similar items in EconPapers)
Pages: 71 pages
Date: 2025-04-25
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