Inflation Statistics Understate Costs for Lower Earners, Paper Says
The Story
A new NBER working paper by Kunal Sangani documents a phenomenon called “cheapflation” where inflation rates for low-income households are disproportionately sensitive to upstream costs. The paper finds that official statistics understate differences in inflation experienced by low- and high-income households by 70–90 percent.
Key Facts
- The paper introduces a new source of fluctuations in inflation inequality: when upstream input costs rise, varieties within a product category tend to have similar absolute price increases, but the same absolute increase constitutes a larger percentage change for low-price products.
- This mechanism is called “cheapflation.”
- Low-income households tend to buy lower-priced varieties, so the inflation rates they face are disproportionately sensitive to upstream costs.
- Using data on food-at-home purchases, the paper shows this mechanism generates cycles in inflation inequality and excessive volatility in inflation for low-income households relative to high-income households.
- The channel accounts for observed fluctuations in inflation inequality over time, including surges in cheapflation and inflation inequality during both the Great Recession and the 2021–2023 post-pandemic inflation.
- Official statistics mask these within-category differences in inflation and thus understate the differences in inflation experienced by low- and high-income households by 70–90 percent.
- The paper provides evidence that this mechanism applies to a range of consumption categories beyond food at home.
- The mechanism also leads to systematic differences in inflation across cities and import price inflation across countries in response to nationwide and global cost shocks.
Conflicting Reports
No conflicting reports identified in the source article.
Still Unclear
No open questions identified in the source article.
Misconceptions
No widespread misconceptions addressed in the source article.
Key Figures
- Kunal Sangani, author of the NBER working paper.
Sources: marginalrevolution.com
