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