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Sources of Bias in Inflation Rates and Implications for Inflation Dynamics
Author(s) -
BRAUN RAHEL,
LEIN SARAH M.
Publication year - 2021
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/jmcb.12848
Subject(s) - inflation (cosmology) , economics , econometrics , percentage point , shock (circulatory) , point (geometry) , inflation rate , relative price , statistics , monetary economics , interest rate , mathematics , physics , medicine , geometry , finance , theoretical physics
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 data sets. While the often‐acknowledged substitution bias is shown to be relatively small, neglected preference adjustment and product entry/exit result 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.