Attention to food prices and the upward bias in inflation expectations

During the 2022-2023 inflation surge, the gap between households’ inflation expectations and realized inflation in Slovakia widened from 7 to 17 p.p., contradicting the view that greater attention to inflation might mitigate the upward bias. Using LASSO and other machine-learning variableselection techniques, we find that movements in food prices which rose faster than headline inflation are strongly associated with the upward bias increase. This evidence highlights selective attention in expectation formation and suggests that, when sectoral price dynamics greatly exceed aggregate inflation, central banks might assign those sectors greater weight in their inflation target.