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Life Cycle Price Trends and Product Replacement: Implications for the Measurement of Inflation

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  • Daniel Melser

    (Moody's Analytics)

  • Iqbal A. Syed

    (School of Economics, Australian School of Business, the University of New South Wales)

Abstract

The paper explores the extent to which products follow systematic pricing patterns over their life cycle and the impact this has on the measurement of inflation. Using a large US scanner data set on supermarket products and applying flexible regression methods, we find that on average prices decline as items age. This life cycle price change is often attributed to quality difference in the construction of CPI as items are replaced due to disappearance or during sample rotations. This introduces a systematic bias in the measurement of inflation. For our data we find that the life cycle bias leads to the underestimation of inflation by around 0.30 percentage points each year for the products examined.

Suggested Citation

  • Daniel Melser & Iqbal A. Syed, 2014. "Life Cycle Price Trends and Product Replacement: Implications for the Measurement of Inflation," Discussion Papers 2014-40, School of Economics, The University of New South Wales.
    • Handle: RePEc:swe:wpaper:2014-40
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    File URL: http://research.economics.unsw.edu.au/RePEc/papers/2014-40.pdf
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    References listed on IDEAS

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    Cited by:

    1. Klaus Adam & Henning Weber, 2023. "Estimating the Optimal Inflation Target from Trends in Relative Prices," American Economic Journal: Macroeconomics, American Economic Association, vol. 15(3), pages 1-42, July.
    2. Yuki Teranishi, 2017. "Product Cycles and Prices:Search Foundation," UTokyo Price Project Working Paper Series 079, University of Tokyo, Graduate School of Economics.
    3. Klaus Adam & Henning Weber, 2019. "Optimal Trend Inflation," American Economic Review, American Economic Association, vol. 109(2), pages 702-737, February.
    4. Jan de Haan & Rens Hendriks & Michael Scholz, 2016. "A Comparison of Weighted Time-Product Dummy and Time Dummy Hedonic Indexes," Graz Economics Papers 2016-13, University of Graz, Department of Economics.
    5. Daniel Melser & Iqbal A. Syed, 2017. "The product life cycle and sample representativity bias in price indexes," Applied Economics, Taylor & Francis Journals, vol. 49(6), pages 573-586, February.
    6. Kozo Ueda & Kota Watanabe & Tsutomu Watanabe, 2016. "Product Turnover and Deflation: Evidence from Japan," CARF F-Series CARF-F-400, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    7. Nobuhiro Abe & Kimiaki Shinozaki, 2018. "Compilation of Experimental Price Indices Using Big Data and Machine Learning:A Comparative Analysis and Validity Verification of Quality Adjustments," Bank of Japan Working Paper Series 18-E-13, Bank of Japan.
    8. Daniel Melser, 2019. "Valuing the quantity and quality of product variety to consumers," Empirical Economics, Springer, vol. 57(6), pages 2107-2128, December.
    9. Daniel Melser & Michael Webster, 2021. "Multilateral Methods, Substitution Bias, and Chain Drift: Some Empirical Comparisons," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 67(3), pages 759-785, September.
    10. Adam, Klaus & Weber, Henning, 2019. "Price trends over the product life cycle and the optimal inflation target," Discussion Papers 32/2019, Deutsche Bundesbank.
    11. Crystal G. Konny & Brendan K. Williams & David M. Friedman, 2019. "Big Data in the US Consumer Price Index: Experiences and Plans," NBER Chapters, in: Big Data for Twenty-First-Century Economic Statistics, pages 69-98, National Bureau of Economic Research, Inc.
    12. Kozo Ueda & Kota Watanabe & Tsutomu Watanabe, 2018. "Product Turnover and the Cost of Living Index: Quality vs. Fashion Effects," Globalization Institute Working Papers 337, Federal Reserve Bank of Dallas.
    13. Nobuhiro Abe & Yojiro Ito & Ko Munakata & Shinsuke Ohyama & Kimiaki Shinozaki, 2016. "Pricing Patterns over Product Life-Cycle and Quality Growth at Product Turnover: Empirical Evidence from Japan," Bank of Japan Working Paper Series 16-E-5, Bank of Japan.
    14. Adam, Klaus & Weber, Henning, 2017. "Optimal Trend Inflation," CEPR Discussion Papers 12160, C.E.P.R. Discussion Papers.
    15. Jan de Haan & Rens Hendriks & Michael Scholz, 2021. "Price Measurement Using Scanner Data: Time‐Product Dummy Versus Time Dummy Hedonic Indexes," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 67(2), pages 394-417, June.
    16. Jakub Hajda, 2019. "Product Market Strategy and Corporate Policies," 2019 Papers pha1309, Job Market Papers.

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    More about this item

    Keywords

    Consumer price index (CPI); matched-model index; price skimming strategy; quality change bias; sample rotation;
    All these keywords.

    JEL classification:

    • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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