Food for Thought: Inflation Perceptions and Household Heterogeneity

Perceived inflation in the euro area systematically departs from measured HICP inflation. This gap arises because households place disproportionate weight on salient consumption items, especially frequently purchased goods such as food. Since these items also tend to adjust prices more often, they generate inflation signals that are noisier and more volatile than aggregate inflation. At the micro level, households that are more exposed to food in their consumption basket exhibit a stronger response of perceived inflation to an adverse food supply shock. Additionally, stronger inflation perceptions are accompanied by a sharper increase in pessimism regarding consumption attitudes. At the macro level, perceived inflation reacts with more intensity and persistence compared with actual inflation, while retail sales decline. To interpret these results, we develop a HANK framework with non-homothetic preferences and subjective inflation perceptions. The model shows that heterogeneity in consumption baskets and the greater price volatility of salient goods jointly amplify the effects of negative supply shocks affecting those goods, turning food price disturbances into broader and more persistent contractions in economic activity.