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How food prices shape inflation expectations and the monetary policy response

Author

Listed:
  • Bonciani, Dario

    (Sapienza University of Rome)

  • M Masolo, Riccardo

    (Universitá Cattolica del Sacro Cuore, Milano)

  • Sarpietro, Silvia

    (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

  • Bonciani, Dario & M Masolo, Riccardo & Sarpietro, Silvia, 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
    as

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    File URL: https://www.bankofengland.co.uk/-/media/boe/files/working-paper/2024/how-food-prices-shape-inflation-expectations-and-the-monetary-policy-response.pdf
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    References listed on IDEAS

    as
    1. Dietrich, Alexander M., 2024. "Consumption categories, household attention, and inflation expectations: Implications for optimal monetary policy," Journal of Monetary Economics, Elsevier, vol. 147(C).
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    More about this item

    Keywords

    Inflation expectations; inflation perceptions; monetary policy;
    All these keywords.

    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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