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Sources of Bias in Inflation Rates and Implications for Inflation Dynamics

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  • RAHEL BRAUN
  • SARAH M. LEIN

Abstract

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.

Suggested Citation

  • Rahel Braun & Sarah M. Lein, 2021. "Sources of Bias in Inflation Rates and Implications for Inflation Dynamics," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 53(6), pages 1553-1572, September.
    • Handle: RePEc:wly:jmoncb:v:53:y:2021:i:6:p:1553-1572
    DOI: 10.1111/jmcb.12848
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    Cited by:

    1. Santiago E. Alvarez & Sarah M. Lein, 2020. "Tracking inflation on a daily basis," Swiss Journal of Economics and Statistics, Springer;Swiss Society of Economics and Statistics, vol. 156(1), pages 1-13, December.

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    More about this item

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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