Inflation risk and heterogeneous trading down

Mar Domenech Palacios

No 3156, Working Paper Series from European Central Bank

Abstract: I examine how households adjust the quality of their purchases in response to adverse economic shocks. Using household scanner data from Germany, I document heterogeneous responses across income levels. Higher-income households tend to reduce the quality of the goods they purchase, whereas lower-income households, who typically consume lower-quality goods, show a limited propensity to trade down, likely due to a limited ability to do so. To assess the equilibrium effects of an aggregate shift in demand toward lower-quality varieties, I implement a shift-share research design. This approach leverages two key components: (i) pre-determined spending shares on middle-quality varieties across the product space for a wide range of sociodemographic groups prior to the great financial crisis, and (ii) variation in population growth across these groups during the crisis. I find that a 1% aggregate demand shift toward lower-quality varieties following a recession raises the relative price of low-quality varieties by about 0.45% on average. JEL Classification: E21, E31, E32, E60

Keywords: business cycle; inflation; prices; quality; trading down (search for similar items in EconPapers)
Date: 2025-11
New Economics Papers: this item is included in nep-eur and nep-mon
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