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Food prices matter most: Sensitive household inflation expectations

Author

Listed:
  • Nikoleta Anesti

    (Bank of England)

  • Vania Esady

    (Bank of England)

  • Matthew Naylor

    (Bank of England
    University of Oxford)

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.

Suggested Citation

  • Nikoleta Anesti & Vania Esady & Matthew Naylor, 2024. "Food prices matter most: Sensitive household inflation expectations," Discussion Papers 2434, Centre for Macroeconomics (CFM).
    • Handle: RePEc:cfm:wpaper:2434
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    File URL: https://www.lse.ac.uk/CFM/assets/pdf/CFM-Discussion-Papers-2024/CFMDP2024-34-Paper.pdf
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    More about this item

    Keywords

    Households; inflation expectations; inflation experiences; heterogeneity; food prices;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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