MSU study: Grocery prices shape Americans’ views on inflation

Americans encounter inflation most directly at the grocery checkout and on the restaurant bill. A new study from Michigan State University finds that those two experiences are linked to expectations about the economy in very different ways.

Restaurant price increases are associated with a sharp but short-lived rise in consumers’ inflation expectations, while grocery price increases have a smaller initial association that remains measurable over subsequent months. The study was recently published in the Journal of the Agricultural and Applied Economics Association.

“Most people don’t experience inflation as a statistic,” said David Ortega, a study co-author and the Noel W. Stuckman Chair in Food Economics and Policy at MSU. “They experience it when the grocery bill is higher than it was last month, or when a meal out costs more than they remember. We wanted to understand how those everyday experiences relate to what people expect going forward, and what we found is that groceries and restaurants appear to play very different roles. One grabs your attention. The other stays with you.”

Food accounts for roughly 13% of U.S. household spending, the third-largest expenditure category behind housing and transportation, and food prices are among the most visible signals of inflation in daily life.

The researchers analyzed monthly data from December 1982 through August 2024, combining Consumer Price Index data from the U.S. Bureau of Labor Statistics with inflation expectations and consumer sentiment from the University of Michigan Surveys of Consumers. They separated food prices into food at home, which covers groceries, and food away from home, which covers restaurants and other prepared meals, and compared both against energy and core prices, the measure that excludes food and energy.

The researchers found that an increase in restaurant prices is associated with an immediate rise in consumers’ one-year inflation expectations that is more than double the immediate effect for a comparable increase in grocery prices. But the restaurant impact largely disappears within a month, while the grocery association remains measurable three months later.

“This reflects how often people run into these prices,” said Rundong Peng, lead author of the study and a doctoral student in the Department of Agricultural, Food and Resource Economics at MSU. “Grocery shopping is something most households do every week or two, so each trip is another reminder that prices have gone up. Eating out is a choice. People can cut back or simply stop noticing more quickly once the initial sticker shock passes.”

Food price changes were more closely tied to immediate movements in inflation expectations than energy or core price changes. The relationship with core prices was small at first and built gradually, peaking two months later, consistent with a broad basket of goods whose price changes are less frequently observed. Energy prices, despite their volatility, showed a comparatively modest relationship.

Price stability and consumer confidence

The study then turns to how inflation expectations relate to consumer sentiment, a widely followed gauge of how households feel about the economy and their own finances. After accounting for recession and pandemic periods, consumer sentiment growth was estimated to be roughly 3.4% higher when median one-year inflation expectations were in the 0% to 2% range than when expectations exceeded 4%. Expectations in the 2% to 4% range showed only a small difference from the high-inflation reference group.

“Consumers have a clear psychological threshold when it comes to inflation,” Peng said. “Once expected inflation crosses that 2% mark, we see a noticeable drag on how people feel about their economic future, underscoring why the Federal Reserve’s 2% target aligns so closely with consumer well-being.”

The estimates also indicate that consumer sentiment is persistent, with recent changes tending to carry into subsequent months. Sentiment adjusts gradually rather than snapping back when conditions change. Recessions were associated with an additional 2% decline in sentiment growth, and the pandemic period with a further 1% decline.

Implications for policy and the food sector

Taken together, the results identify a chain linking the prices households encounter regularly with inflation expectations and consumer confidence, which prior research links to household spending. Because the estimated grocery price effect persists while the restaurant price effect fades more quickly, sustained grocery inflation may present a greater challenge for keeping inflation expectations anchored than a temporary spike in menu prices, even when restaurant price increases generate the larger initial reaction.

“Stable grocery prices are more than a household budget issue,” Peng said. “Because people see those prices repeatedly, sustained increases can become part of how they think about inflation more broadly.”

Ortega said the study highlights why food price stability matters for public perceptions of the economy.

“Weather disruptions, animal disease events and trade policy changes can all place pressure on grocery prices. When those pressures persist, they may have implications not only for household budgets but also for inflation expectations and consumer confidence.”