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How Food Prices Shape Inflation Expectations and the Monetary Policy Response

Author

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  • Dario Bonciani
  • Riccardo M. Masolo
  • Silvia Sarpietro

Abstract

Food prices are salient for households’ inflation perceptions and expectations at both the micro and macro levels. UK survey data indicate over 60% of households report food prices as very important for perceived inflation. These households exhibit a stronger correlation between perceived and expected inflation, reflecting backward-looking expectations. An SVAR with aggregate data shows food-price shocks generate larger and more persistent movements in expectations than “representative” inflation shocks. Finally, embedding behavioural expectations in a New Keynesian model, we find that, following a food-price shock, welfare losses are mitigated when monetary policy responds to households’ inflation expectations, even if they overreact.

Suggested Citation

  • Dario Bonciani & Riccardo M. Masolo & Silvia Sarpietro, 2026. "How Food Prices Shape Inflation Expectations and the Monetary Policy Response," Working Papers in Public Economics 274, Department of Economics and Law, Sapienza University of Rome.
    • Handle: RePEc:sap:wpaper:wp274
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    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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