Abstract
The Covid-19 Pandemic led to changes in expenditure patterns that introduced significant bias in the measurement of Consumer Price Index (CPI) inflation. Using publicly available data on card transactions, I updated the official CPI weights and re-calculated inflation with Covid consumption baskets during 2020. I show that the US CPI underestimated the Covid inflation rate, as consumers spent relatively more on food with positive inflation, and less on transportation and categories experiencing deflation. The bias peaked in May, when US Covid annual inflation was 1.02% compared to just 0.13% in the CPI and low-income households were experiencing nearly twice as much inflation as those at the top of the income distribution. I found similar evidence of higher Covid inflation in 14 of 19 additional countries.
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Notes
In May 2022 the US BLS announced a shift to updating the CPI weights annually with expenditure data from a single previous calendar year. These changes were promising, but the updates are not frequent enough to reduce the biases identified in this paper.
For example, the fixed-basket weights can mitigate problems such as chain-drift present in some chained price indices.
All the data, code, and updated results from this paper are available at projects.iq.harvard.edu/covid-cpi.
See tracktherecovery.org.
See Chetty et al. (2020) for more details.
Most NSOs compute a Lowe Index formula at upper levels of aggregation. This introduces small adjustments to the weight to account for relative price changes across categories every month, but they have little impact on the basket weights because quantities are assumed to be fixed. These small price adjustments produce a set of new weights called “relative importance ratios”. In this paper, the term “official CPI weights” is used to refer to these relative importance ratios. See the BLS website for more details.
The Covid index is not a Paasche index because I am not fixing the basket weights to the last period. Instead, my method is closer to the “Chained CPI” produced by the BLS (C-CPI-U). Unfortunately, the BLS can only update expenditure weights gradually, which results in a preliminary C-CPI-U index that does not fully reflect spending patterns until a year later, when a final version is published. In fact, in the Online Appendix I show that the C-CPI-U has had less inflation during the Pandemic than the CPI-U, the benchmark all-items CPI used in this paper.
To build the Core indices, I exclude all food series and split the “Housing” and “Transportation” series to remove their energy components. I also made similar assumptions for the consumer spending patterns at the category level, with details provided in the Online Appendix.
See Bureau of Economic Analysis (2014).
See Figure A3 in the Online Appendix
More quintiles and other details on these weights and their construction are provided in the Online Appendix.
In fact, the increase in inflation of the Covid-basket index relative to a fixed-basket index is smaller for low-income households, because their changes in spending patterns have been less persistent over time (as documented by Chetty et al. (2020). In other words, inflation inequality is greater during Covid, but it is actually smaller than what would be measured with a fixed-basket index. See the Online Appendix for details.
By contrast, differences in expenditure patterns at lower levels of aggregation may matter more in the long-run, as documented in Jaravel (2019).
These data are published at https://www.bbvaresearch.com/en/special-section/charts/.
See the Online Appendix for a comparison of Covid spending patterns in the US and Spain.
See also Dixon (2020).
See Cavallo et al. (2020).
See Bureau of Labor Statistics (2020).
See Curtin (2020).
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Acknowledgements
I am grateful to Florencia Hnilo for excellent research assistance, to John Friedman for sharing the Opportunity Insights data, to Caroline Coughlin and Manuel Bertolotto for help with the CPI data, and to Rafael Di Tella, Marshall Reinsdorf, Dan Sichel, Xavier Jaravel, and Pete Klenow for helpful comments and suggestions. Financial support for this paper was provided by Harvard Business School.
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