Working Paper: CEPR ID: DP10726
Authors: Etienne Gagnon; David López-Salido; Jason Sockin
Abstract: Coibion, Gorodnichenko, and Hong (2015) argue that the CPI underestimates the deceleration in consumer prices during economic downturns because the index fails to account for the reallocation of consumer spending from high- to low-price stores. We show that these authors' measures of inflation with and without store switching suffer from several methodological deficiencies, including an excessive truncation of price adjustments and the lack of a treatment for missing observations. When we address these deficiencies, the authors' key regression results no longer suggest that greater store switching during downturns is a statistically or economically significant phenomenon.
Keywords: Effective Prices; Inflation Measurement; Outlet Substitution Bias
JEL Codes: D12; E31; E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| CGH's methodology (C68) | overstatement of the cyclical sensitivity of effective price inflation compared to posted price inflation (E31) |
| aggressive truncation of price movements (G13) | dampening of cyclical movements for posted price inflation more than effective price inflation (E31) |
| less severe truncation (C24) | diminishes statistical and economic significance of differences in sensitivity to labor market slack (J79) |
| corrected methodology (C80) | loss of significance of CGH's regression results regarding cyclical role for store switching (C34) |
| corrected estimates (C51) | one-percentage-point increase in the local unemployment rate lowers 12-month inflation by about 0.15 percentage points (E31) |
| store switching's impact on inflation (E31) | not economically significant (F69) |