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  3. 2022
  4. Preliminary Program
  5. Inflation Heterogeneity: Implications for Inequality and Measurement
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Inflation Heterogeneity: Implications for Inequality and Measurement

Paper Session

Saturday, Jan. 8, 2022 10:00 AM - 12:00 PM (EST)

Hosted By: Society of Government Economists
  • Chair: Ana Aizcorbe, U.S. Bureau of Economic Analysis

Adam Smith's Linen Shirt

David Argente
,
Pennsylvania State University
Chang-Tai Hsieh
,
University of Chicago and NBER
Munseob Lee
,
University of California-San Diego

Abstract

We show that the perceived quality of products, even when defined at the finest level of aggregation, changes over time. This contrasts with the standard assumptions used in the construction of price indexes, which require the quality of products to stay constant over time, at least on average. We develop a methodology to select products whose price changes are mainly driven by supply changes. We then show theoretically that this sample can be used to construct an unbiased aggregate price index. This index is the product of the conventional price index and the share of common varieties, and both components fully compensate for movements of each other. We find that previous estimates significantly underestimate the cost of living in the US.

Granular Inflation

Dominic Smith
,
U.S. Bureau of Labor Statistics
Raphael Schoenle
,
Brandeis University and Federal Reserve Bank of Cleveland

Abstract

We establish several new facts about inflation micro data. First, inflation is granular: The top 10 categories of personal consumption expenditures (PCE) account for a large share of PCE inflation. Second, the importance of granularity for the inflationary process has increased over time, as measured by the granular residual. Third, the distribution of inflation rates has extremely fat tails, especially at a monthly rather than a year-on-year frequency. Over time, skewness flipped from a right-skew to a left-skew in the mid-1980s. As a result, median inflation has tended to be higher than mean inflation. Fourth, the covariance of category inflation rates has dropped over time and exhibits a stable distribution over the last 30 years. We study the implications of these changes for the effectiveness of monetary policy and the measurement of inflation.

Democratic Aggregation: Issues and Implications for Consumer Price Indexes

Robert Martin
,
U.S. Bureau of Labor Statistics

Abstract

Most consumer price indexes (CPI) implicitly weight households by their total expenditure. These may differ from indexes that weight households equally, which are sometimes called "democratic." I calculate democratic counterparts to the Bureau of Labor Statistic's CPI and Chained CPI products in order to estimate the impact of aggregation method. The building blocks are household-level Lowe and Tornqvist indexes constructed using matched Consumer Expenditure Survey (CE) Diary and Interview microdata, along with CPI elementary item-area indexes. I estimate that over 2002-2019, democratic versions of the CPI-U and C-CPI-U exceed their published counterparts by 0.08 and 0.24 percentage points per year, respectively.

The Granular Origins of Inflation

Sarah Lein
,
University of Basel
Santiago Alvarez
,
University of Basel
Raphael Auer
,
Bank for International Settlements
Andrei Levchenko
,
University of Michigan

Abstract

Using homescan data for 14 countries and the years 2005 to 2016, we examine the role of large firms and their products for inflation dynamics. We first decompose inflation into the unweighted average and the granular component. After showing that this simple granular component is substantial in magnitude, we in turn examine it drivers: we decompose inflation in three unweighted components, capturing the level of inflation that would prevail if all manufacturers, categories and products in the data were to have equal weight, as well as three granular components, capturing inflation granularities at these three levels. We find that the manufacturer granular residual explains a substantial share of aggregate inflation in low-inflation countries. In contrast, in Argentina inflation is driven by aggregate shocks and the manufacturer granular residual plays a minor role. Last, we examine the role of granularities for inflation co-movement across countries. Our preliminary results show that co-movement of country-specific manufacturer granular residuals also generates international co-movement in aggregate inflation rates.

Discussant(s)
Alberto Cavallo
,
Harvard Business School
Raphael Auer
,
Bank for International Settlements
David Johnson
,
University of Michigan
Raphael Schoenle
,
Brandeis University and Federal Reserve Bank of Cleveland
JEL Classifications
  • E0 - General
  • O0 - General