Inflation Inequality: Measurement, Causes, and Policy Implications

Abstract

Does inflation vary across the income distribution? This article reviews the growing literature on inflation inequality, describing recent advances and opportunities for further research in four areas. First, new price index theory facilitates the study of inflation inequality. Second, new data show that inflation rates decline with household income in the United States. Accurate measurement requires granular price and expenditure data because of aggregation bias. Third, new evidence quantifies the impacts of innovation and trade on inflation inequality. Contrary to common wisdom, empirical estimates show that the direction of innovation is a significant driver of inflation inequality in the United States, whereas trade has similar price effects across the income distribution. Fourth, inflation inequality and non-homotheticities have important policy implications. They transform cost-benefit analysis, optimal taxation, the effectiveness of stabilization policies, and our understanding of secular macroeconomic trends—including structural change, the decline in the labor share and interest rates, and labor market polarization. Expected final online publication date for the Annual Review of Economics, Volume 13 is August 2021. Please see http://www.annualreviews.org/page/journal/pubdates for revised estimates.

Liquidity Shortfalls during the COVID-19 Outbreak: Assessment and Policy Responses

“…The question is, what economic concept did GDP measure against in such a disrupted context? Related questions arise at the microeconomic level: the property of non-homotheticity of preferences that we will see to be the cause of the path dependency problem prohibits the assumption that price increases have the same impact for households with different incomes, forcing the consideration of differentiated measurements of inflation between categories of households (Jaravel, 2021;Jaravel & Lashkari, 2022).…”

The Well‐Being Cost of Inflation Inequalities

“…Typically, two types of consumption data sets are used to estimate the level of inflation inequalities: micro-expenditure surveys and scanner data. Both approaches have abundantly shown important levels of inflation inequality (Jaravel, 2021). Based on American scanner data, Kaplan and Schulhofer-Wohl (2017) document "massive heterogeneity in inflation rates at the household level" (ibid, p. 36) and show that lower-income households have experienced higher inflation rates over the period of study (2004)(2005)(2006)(2007)(2008)(2009)(2010)(2011)(2012)(2013).…”

The Use of Scanner Data for Economics Research

“…They use AC Nielsen data to quantify a substantial "taste-shock bias" that tends to lead to an upward bias in inflation measurement under standard price indices. Jaravel (2021) provides a recent review of this literature. A key theme is that the granular quantity and price information provided by scanner data, which allows us to measure differences in spending and price paid for disaggregate products across households of different incomes and in different locations, has been key to the recent progress of this literature.…”