NBER Paper Finds Inflation Undermeasured for Low-Income Households

The Story

A new NBER working paper by Kunal Sangani documents a source of fluctuation in inflation inequality called “cheapflation.” When upstream input costs rise, product varieties within a category tend to have similar absolute price increases. However, the same absolute increase represents a larger percentage change for lower-priced products. Since low-income households tend to buy lower-priced varieties, they face inflation rates 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 for low-income relative to high-income households. Official statistics mask these within-category differences, understating the gap in inflation experienced by low- and high-income households by 70–90 percent. The mechanism also accounts for surges in cheapflation during both the Great Recession and the 2021–2023 post-pandemic inflation.

Key Facts

• The NBER working paper by Kunal Sangani documents a new source of fluctuations in inflation inequality called “cheapflation.”
• 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.
• Low-income households tend to buy lower-priced varieties and face inflation rates 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 for low-income relative to high-income households.
• The mechanism accounts for surges in cheapflation during the Great Recession and the 2021–2023 post-pandemic inflation.
• Official statistics mask within-category differences in inflation and understate differences in inflation experienced by low- and high-income households by 70–90 percent.
• The mechanism applies to a range of consumption categories beyond food at home.
• The same mechanism leads to systematic differences in inflation across cities and import price inflation across countries in response to 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