Consumer Inventory and the Cost of Living Index: Theory and Some Evidence from Japan

Kozo Ueda, Kota Watanabe and Tsutomu Watanabe
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Kota Watanabe: Canon Institute for Global Studies and University of Tokyo
Tsutomu Watanabe: University of Tokyo

No 25, Working Papers on Central Bank Communication from University of Tokyo, Graduate School of Economics

Abstract: This paper examines the implications of consumer inventory for cost-of-living indices (COLIs) and business cycles. We begin by providing stylized facts about consumer inventory using scanner data. We then construct a quasi-dynamic model to describe consumers’ purchase, consumption, and inventory behavior. A key feature of our model is that inventory is held by household producers, not by consumers, which enables us to construct a COLI in a static manner even in an economy with storable goods. Based on this model, we show that stockpiling during temporary sales generates a substantial bias, or so-called chain drift, in conventional price indices, which are constructed without paying attention to consumer inventory. However, the chain drift is greatly mitigated in our COLI, which is based on consumption prices (rather than purchase prices) and quantities consumed (rather than quantities purchased). We provide empirical evidence supporting these theoretical predictions. We also show empirically that consumers’ inventory behavior tends to depend on labor market conditions and the interest rate.

Keywords: consumer inventory; cost-of-living index; temporary sales; inflation; price elasticity (search for similar items in EconPapers)
JEL-codes: C43 D15 E31 (search for similar items in EconPapers)
Pages: 63 pages
Date: 2020-08
New Economics Papers: this item is included in nep-mac
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Working Paper: Consumer Inventory and the Cost of Living Index: Theory and Some Evidence from Japan (2020)
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