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How food prices shape inflation expectations and the monetary policy response

Author

Listed:
  • Dario Bonciani

    (Sapienza University of Rome)

  • Riccardo M Masolo

    (Universitá Cattolica del Sacro Cuore, Milano)

  • Silvia Sarpietro

    (University of Bologna)

Abstract

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.

Suggested Citation

  • Dario Bonciani & Riccardo M Masolo & Silvia Sarpietro, 2024. "How food prices shape inflation expectations and the monetary policy response," Bank of England working papers 1094, Bank of England.
    • Handle: RePEc:boe:boeewp:1094
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    References listed on IDEAS

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    Cited by:

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    2. Andrea Boitani & Catalin Dragomirescu-Gaina & Andrea Monticini, 2025. "Managing the chaos: policy challenges in a hyperinflationary environment," DISCE - Working Papers del Dipartimento di Economia e Finanza def142, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).
    3. Andrea Albanese & Lorenzo Cappellari & Marco Ovidi, 2025. "Earning ability over the life cycle," DISCE - Working Papers del Dipartimento di Economia e Finanza def148, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).
    4. Elena Cottini & Lorena Popescu & Luca Salmasi & Gilberto Turati, 2025. "Poisoned Air, Shortened Lives: PM2.5 Exposure and Premature Mortality in Southern European Cities," DISCE - Working Papers del Dipartimento di Economia e Finanza def143, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).
    5. Federico Di Pace & Giacomo Mangiante & Riccardo Masolo, 2024. "Monetary policy rules: the market’s view," DISCE - Working Papers del Dipartimento di Economia e Finanza def137, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).

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    More about this item

    Keywords

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    JEL classification:

    • D10 - Microeconomics - - Household Behavior - - - General
    • 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
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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