Food Prices and Inflation Expectations in New Zealand

Food prices are conspicuous, and spending on food constitutes a considerable share of household expenditure. In this study, we use partially identified Bayesian structural vector autoregression models to analyze the effects of food price shocks on core inflation and 1- and 5-year inflation expectations in New Zealand. Our findings show that food price shocks caused a slightly delayed yet persistent rise in 1-year inflation expectations, while 5-year expectations and core inflation were largely unaffected. These shocks explained 9.40% of the variability in 1-year inflation expectations but only 4.47% in 5-year expectations. Furthermore, counterfactual analyses reveal that 1-year inflation expectations would have been lower over the period 2020–2023 in the absence of food price shocks. In contrast, 5-year inflation expectations would not have been materially different.