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.

JEL codes: D10, D84, E31, E52, E58, E61.
Keywords: Inflation Expectations, Inflation Perceptions, Monetary Policy.
ISSN 2704-7407
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