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

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  • Daniel Melser
  • Iqbal A. Syed

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.
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Suggested Citation

  • Daniel Melser & Iqbal A. Syed, 2016. "Life Cycle Price Trends and Product Replacement: Implications for the Measurement of Inflation," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 62(3), pages 509-533, September.
  • Handle: RePEc:bla:revinw:v:62:y:2016:i:3:p:509-533
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    File URL: http://hdl.handle.net/10.1111/roiw.12166
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    References listed on IDEAS

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    1. Mark Bils, 2009. "Do Higher Prices for New Goods Reflect Quality Growth or Inflation?," The Quarterly Journal of Economics, Oxford University Press, vol. 124(2), pages 637-675.
    2. Silver, Mick & Heravi, Saeed, 2001. "Scanner Data and the Measurement of Inflation," Economic Journal, Royal Economic Society, vol. 111(472), pages 383-404, June.
    3. Robert J. Hill & Daniel Melser, 2008. "Hedonic Imputation And The Price Index Problem: An Application To Housing," Economic Inquiry, Western Economic Association International, vol. 46(4), pages 593-609, October.
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    7. Mark Bils & Peter J. Klenow & Benjamin A. Malin, 2012. "Reset Price Inflation and the Impact of Monetary Policy Shocks," American Economic Review, American Economic Association, vol. 102(6), pages 2798-2825, October.
    8. Ariel Pakes, 2003. "A Reconsideration of Hedonic Price Indexes with an Application to PC's," American Economic Review, American Economic Association, vol. 93(5), pages 1578-1596, December.
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    1. repec:taf:applec:v:49:y:2017:i:6:p:573-586 is not listed on IDEAS
    2. 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.
    3. 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.
    4. Kozo Ueda & Kota Watanabe & Tsutomu Watanabe, 2016. "Product Turnover and Deflation: Evidence from Japan," UTokyo Price Project Working Paper Series 073, University of Tokyo, Graduate School of Economics.
    5. Adam, Klaus & Weber, Henning, 2017. "Optimal Trend Inflation," CEPR Discussion Papers 12160, C.E.P.R. Discussion Papers.
    6. Ueda, Kozo & Watanabe, Kota & Watanabe, Tsutomu, 2018. "Product Turnover and the Cost of Living Index: Quality vs. Fashion Effects," Globalization and Monetary Policy Institute Working Paper 337, Federal Reserve Bank of Dallas.
    7. 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.

    More about this item

    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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