Staff Working Paper No. 1,125
By Nikoleta Anesti, Vania Esady and Matthew Naylor
We construct a novel data set to investigate the sensitivity of household inflation expectations to personal experienced inflation, testing whether households weigh price changes differently across items in the consumption basket. Across households of all age, income, gender, work status, UK region, and house tenure groups, food prices matter significantly more for inflation expectations dynamics than other components, including energy. In particular, households’ expectations are sensitive to changes in food price-driven inflation at short, medium and long horizons, and this association is persistent, non-linear and asymmetric. Our results imply that the risk of household expectations contributing to persistent inflationary dynamics are greatest following large and inflationary shocks to, specifically, food prices. Moreover, our findings can rationalise a number of empirical regularities related to household expectations: their upwards bias relative to actual inflation; cross-sectional heterogeneity across demographic groups; and their ‘supply-side’ oriented view of the economy.
Food prices matter most: sensitive household inflation expectations
