Sectoral Price Salience and Price Flexibility: Three Essays on Households’ Inflation Expectations

Advisor: Carlos Viana de Carvalho

Households experience inflation directly when they buy groceries or fuel their cars, not through abstract indices. This dissertation studies how salient price changes shape inflation expectations,  acroeconomic dynamics, and monetary policy. The first chapter links U.S. sector-level CPI data with survey forecasts and shows that the frequency of price changes, rather than expenditure share or volatility, drives  household expectations. A one percentage point rise in a sector’s reset frequency increases its correlation with 1-year inflation expectations by about 0.44 percentage points. The second chapter introduces a diagnostic salience parameter into a fifteen-sector New Keynesian model. Bayesian estimation on U.S. data from 1983Q1 to 2019Q4 favors this behavioral framework over the rational expectations  benchmark. Welfare analysis, however, still points to core inflation stabilization. The third chapter develops a two-sector adaptive-learning model with heterogeneous price stickiness. It defines anchored expectations formally and shows how shocks in flexible-price sectors, amplified by biased attention, can unsettle long-run beliefs. Together, the essays identify which prices matter most for households and quantify their macroeconomic effects. The findings suggest that central banks should weigh credibility risks when shocks hit salient prices, especially food and fuel, while focusing on stabilizing stickier sectors when expectations remain anchored.