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Measuring Price Inflation and Growth in Economic Well-Being with Income-Dependent Preferences

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Abstract

How can we accurately measure changes in living standards over time in the presence of price inflation? In this post, I discuss a novel and simple methodology that uses the cross-sectional relationship between income and household-level inflation to construct accurate measures of changes in living standards that account for the dependence of consumption preferences on income. Applying this method to data from the U.S. suggests potentially substantial mismeasurements in our available proxies of average growth in consumer welfare in the U.S.

Suggested Citation

  • Danial Lashkari, 2024. "Measuring Price Inflation and Growth in Economic Well-Being with Income-Dependent Preferences," Liberty Street Economics 20240108, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednls:97549
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    File URL: https://libertystreeteconomics.newyorkfed.org/2024/01/measuring-price-inflation-and-growth-in-economic-well-being-with-income-dependent-preferences/
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    More about this item

    Keywords

    real consumption; welfare; growth; Inflation; inequality; nonhomothetic preferences;
    All these keywords.

    JEL classification:

    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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