Inflation is higher than you think

The Covid-19 Pandemic has led to changes in consumer expenditure patterns that can introduce significant bias in the measurement of inflation. I use data collected from credit and debit transactions in the US to update the official basket weights and estimate the impact on the Consumer Price Index (CPI). I find that the Covid inflation rate is higher than the official CPI in the US, for both headline and core indices. I also find similar results with Covid baskets in 10 out of 16 additional countries. The difference is significant and growing over time, as social-distancing rules and behaviors are making consumers spend relatively more on food and other categories with rising inflation, and relatively less on transportation and other categories experiencing significant deflation.

That is from Alberto Cavallo, and as for concrete numbers: “The Covid Core deflation in April was only half of that in the Core CPI, while theannual inflation rate is at 1.73% compared to the 1.43% in the official Core index.”  And that is not accounting for the disappearing goods bias: “For example, the share of products with missing prices in the US CPI rose from 14% in April 2019 to 34% in April 2020.”

Of course this also has implications for those insisting we should think of this primarily as a demand shock.