Sources of Bias in Inflation Rates and Implications for Inflation Dynamics

Sarah Lein and Rahel Braun

No 15663, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Official statistics measuring the cost of living are known to suffer from several biases. This paper shows that the size of the biases can vary with economic conditions. Using homescan data, it is first confirmed that official price indexes can be tracked using such granular datasets. While the often-acknowledged substitution bias is shown to be relatively small, neglected preference adjustment and product entry/exit results in a 2.6 percentage point bias in the annual inflation rate on average. Furthermore, the bias is particularly large in the aftermath of a shock to relative prices, increasing to 3.7 percentage points.

Keywords: Homescan data; Inflation measurement; Bias in inflation indexes (search for similar items in EconPapers)
JEL-codes: C23 C3 E31 E4 E5 (search for similar items in EconPapers)
Date: 2021-01
New Economics Papers: this item is included in nep-cwa, nep-mac and nep-mon
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Citations: View citations in EconPapers (4)

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Related works:
Journal Article: Sources of Bias in Inflation Rates and Implications for Inflation Dynamics (2021)
Working Paper: Sources of Bias in Inflation Rates and Implications for Inflation Dynamics (2019)
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