Consumption patterns and inflation measurement issues during the COVID-19 pandemic
Retrieved on:
Wednesday, November 11, 2020
The pandemic has generated two main challenges when measuring consumer price inflation.
Key Points:
- The pandemic has generated two main challenges when measuring consumer price inflation.
- First, the pandemic triggered unusually large changes in household spending patterns which are not reflected in aggregated consumer price indices.
- [3] The HICP is compiled using consumption weights that are kept constant within a given calendar year.
- When constructing the HICP, the price changes of individual items are weighted using household consumption shares that are fixed for the calendar year.
- This reflects the intended purpose of the HICP of estimating pure price changes without accounting for shifts in household consumption patterns.
- While keeping the weights constant within a calendar year does not generate measurement issues in normal times, the nature of the pandemic shock has triggered large consumption shifts over a short period of time.
- There is a growing body of literature documenting large pandemic-induced changes in household consumption and discussing their implications for inflation.
- The available data suggest that household consumption patterns have changed significantly during the pandemic.
- Relative consumption patterns were stable until the beginning of the pandemic (see Chart A), but the pandemic and the lockdown measures led to a large increase in the weight of some categories (such as food items and communication services) and a reduction in other categories (such as recreation and energy goods).
- As Chart A reports relative weights, some categories show an increase in March/April because the nominal spending in that category contracted less than overall consumption.
- Table A shows our estimates of the development of nominal household spending across categories.
- Since the beginning of the pandemic, inflation as measured by our experimental index has been running higher than HICP inflation, and the difference has remained broadly stable in recent months.
- Chart B shows the gap between the annual rates of change (year-on-year) of the experimental index and the HICP (the orange line in panel a).
- This gap started to open up in March (as shown by the orange bars in panel b) and increased to about 0.2 percentage points in April.
- [14] Intuitively, this reflects consumers switching from lower-than-average inflation categories (such as fuel for transport, covered by Energy) to higher-than-average inflation categories (such as food items).
- The lockdown period also caused issues for HICP price collection.
- [15] Price collection in bricks-and-mortar stores stopped where outlets were closed.
- In addition, sampling in supermarkets and drugstores was largely discontinued in order to protect price collectors.
- Chart C shows the evolution of price imputation in HICP categories from March to August.