Sunday, 12 February 2017

Inflation for the rich and inflation for the poor

A couple of weeks ago, I wrote a post about Statistics New Zealand's new household living-cost price indexes. Overall, these indexes showed slightly higher inflation for those in the lowest income quintile (the lowest income earners) compared with inflation for those in higher quintiles. Xavier Jaravel (Stanford) has a new paper on a similar topic (using U.S. data). From the abstract:
Using detailed barcode-level data in the US retail sector, I find that from 2004 to 2013 higher-income households systematically experienced a larger increase in product variety and a lower inflation rate for continuing products. Annual inflation was 0.65 percentage points lower for households earning above $100,000 a year, relative to households making less than $30,000 a year. I explain this finding by the equilibrium response of firms to market size effects: (A) the relative demand for products consumed by high-income households increased because of growth and rising inequality; (B) in response, firms introduced more new products catering to such households; (C) as a result, continuing products in these market segments lowered their price due to increased competitive pressure.
More evidence that we should be careful how we interpret the overall inflation rate based on a single Consumer Price Index, and that it is probably appropriate for benefits, superannuation, and the minimum wage to be indexed to the median wage (or a similar measure of income) rather than the CPI.

[HT: Marginal Revolution]

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