Whose inflation?

by on June 24, 2016 at 12:21 am in Data Source, Economics | Permalink

There is a new and very important paper on this topic by Greg Kaplan and Sam Schulhofer-Wohl (pdf), emanating from the Minneapolis Fed:

We use scanner data to estimate inflation rates at the household level. Households’ inflation rates are remarkably heterogeneous, with an interquartile range between 6.2 to 9.0 percentage points on an annual basis. Most of the heterogeneity comes not from variation in broadly defined consumption bundles but from variation in prices paid for the same types of goods — a source of variation that previous research has not measured. The entire distribution of household inflation rates shifts in parallel with aggregate inflation. Deviations from aggregate inflation exhibit only slightly negative serial correlation within each household over time, implying that the difference between a household’s price level and the aggregate price level is persistent. Together, the large cross-sectional dispersion and low serial correlation of household-level inflation rates mean that almost all of the variability in a household’s inflation rate over time comes from variability in household-level prices relative to average prices for the same goods, not from variability in the aggregate inflation rate. We provide a characterization of the stochastic process for household inflation that can be used to calibrate models of household decisions.

For the pointer I thank David Levey.  One wonders of course what this means for various propositions in macroeconomics, such as the Fisher effect, or the use of monetary stimulus to alter the meaning of a given nominal reservation wage.  This is also of note: “…observable household characteristics have little power overall to predict household inflation rates.”  By the way, note that the data measure recorded prices, and not prices plus search costs, so the bargain hunters are paying higher net prices than these results would indicate, thus narrowing the differences in inflation rates across persons.

1 Will June 24, 2016 at 12:29 am

The phrase “interquartile range” always sets off my super-skeptical mindset. (As opposed to my typically-skeptical mindset.) Throwing away half of the data needs a very, very strong and explicit justification every time it’s done, in my opinion. They use it repeatedly with no justifications 🙁

2 stephan June 24, 2016 at 12:30 am

Brexit has won !! “Rule, Britannia! rule the waves: “Britons never will be slaves.”

Cameron is toast. Next Frexit. Brussel’s politburo will disband. Italy Spain Portugal and Greece can make their own southern EU.

3 HL June 24, 2016 at 1:24 am

LAND OF HOPE AND GLORY

4 Steve Sailer June 24, 2016 at 12:30 am

I used scanner data back in 1991 to figure out the CPI was overstating inflation for supermarket and drug store products.

5 mulp June 24, 2016 at 12:40 am

“By the way, note that the data measure recorded prices, and not prices plus search costs, so the bargain hunters are paying higher net prices than these results would indicate, thus narrowing the differences in inflation rates across persons.”

I look at the work my sister does to get lower prices as tax exempt wages that can at times be meager, but other times pretty high. However, she is, like maybe 5-10% of shoppers very skilled at this work, which she also generally enjoys.

But that Tyler considers it a cost isn’t surprising because he considers labor costs to be a very high price on economies. Most economists want to eliminate workers from the economy and only keep consumers with high incomes.

6 Tim June 24, 2016 at 1:25 am

I wonder if Tyler will do a post mortem of his massive failure to predict which way Brexit would go. Would be interesting to hear!

Clearly he fell victim to the temptation of telling himself a story about how Remain would win and then seeing confirmation everywhere. (As Tetlock warns against.)

7 stephan June 24, 2016 at 1:36 am

He sure did. The Brits have said ” see EU later “to the dictatorship of the elites and technocrats from the EU. I think it’s just the beginning ,many countries want out. Scotland voted Remain and will probably want to secede from England. Sinn Fein wants a ref over reunification of Ireland with Northern Ireland. That will be the unintended dissolution of two unions under Cameron’s watch

8 msgkings June 24, 2016 at 1:59 am

Search costs have plummeted dramatically thanks to the internet, pretty much one of the main reasons it succeeded. So there’s been deflation there (also?)

9 Jon June 24, 2016 at 5:51 am

What is really confusing here is that if you read carefully, over a long enough period household inflation rates are actually not variable–there is just both wide fluctuations and a constant dispersion in the price levels. The “slightly negative” serial correlation implies that if you experienced a high inflation rate this year, you will be unlikely to have the same high inflation next year.

Considering search costs should not change the long term inflation rate—unless you believe they continuously increase or continuously decrease over time. If I am a bargain hunter this year and a bargain hunter next year, then likely my search costs are the same.

10 rayward June 24, 2016 at 7:08 am

Aren’t different inflation rates across households attributable to what households are purchasing, or do I misunderstand the concept. If I am buying a college education for my college age children and a house in the Bay area, my inflation rate would differ from someone without college age children buying a house in Omaha. Of course, that captures different inflation rates across regions, but it also captures different inflation rates across households. One often hears one’s neighbor complain about rising prices, complain that the government is understated the “true” inflation rate that only the neighbor can detect. Is the neighbor rational or irrational? On the other hand, it has always fascinated me that raising the price of a good can increase the likelihood (or velocity) of its sale, a strategy that many real estate brokers use. Do consumers choose to buy a good with a rising price because they fear an even higher price later and wish to buy at today’s “lower” price? Are consumers with that propensity rational or irrational? Are economists who design policy with that in mind rational or irrational? One often reads who advise that the Fed needs to adopt a higher targeted inflation rate. Is that advice based on the premise that consumers will buy more today if they believe prices will rise tomorrow or is it premised on more aggressive stimulus increasing the demand for goods and for labor, higher wages, and higher inflation as a result? Is that merely a semantic difference or a different way of seeing the economy and how the economy works? While I appreciate the benefits of economists drawing on other social sciences for crafting policy, has economics lost its way to such an extent that psychology is now masquerading as economics?

11 rayward June 24, 2016 at 7:55 am

In economics, inflation is defined as a general increase in prices, a general increase in prices. Of course, there can’t be a general increase in prices absent an increase in wages above the increase in productivity (absent a shock). Whether the Fed’s economic stimulus is achieved through economics or psychology, the goal has to be an increase in wages. In a global economy monetary stimulus might increase wages in (for example) China while having little effect on wages here. For example, an increase in the demand for iphones might have a small effect on the demand for labor here, while having a large effect on the demand for labor in China. By comparison, fiscal stimulus is likely to have more impact on the demand for labor here and thus on wages here. Globalization has emasculated the Fed (sorry, but I couldn’t resist the imagery). Hence, it’s understandable why economists would resort to psychology rather than economics. [I know, the demand for iphones produced in China will affect the trade balance and exchange rates, so in theory it all works out for the best in a global economy. If one wishes to believe Arnold Schwarzenegger is at the helm at the Fed, go ahead and believe it. It works in theory.]

12 libert June 24, 2016 at 9:12 am

I wonder how much of the observed discrepancy is attributable to unobserved differences in product quality. Organic granola and store-brand frosted flakes are both breakfast cereals, but I bet the inflation rate is higher for the former. That doesn’t necessarily reflect paying more for the same good though.

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