Cheapflation and the rise of inflation inequality

Tao Chen, Peter Levell and Martin O'Connell

No 19388, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: The period 2021-2023 saw prices rising at historically high rates. Using household scanner data for fast-moving consumer goods, we show that this was accompanied by historically high rates of inflation inequality. We document systematic increases in the relative prices of cheaper product varieties (‘cheapflation’) over this period, and show that this drove differences in household-specific inflation rates. After accounting for substitution effects and adjusting for non-homothetic preferences, we show that the inflation-income gradient translated into a similar gradient in the cost of maintaining pre shock living standards. We also show evidence, using an earlier exchange rate shock that followed the UK’s vote to leave the European Union, that differential proportional pass-through of cost shocks is likely to be a factor driving cheapflation.

JEL-codes: D12 D30 E31 I30 (search for similar items in EconPapers)
Date: 2024-08
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