Staff Working Paper No. 1,094
By Dario Bonciani, Riccardo M Masolo and Silvia Sarpietro
Food price changes have a strong and 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. 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.
How food prices shape inflation expectations and the monetary policy response
