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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