Working Paper: CEPR ID: DP14880
Authors: Xavier Jaravel; Martin O'Connell
Abstract: We characterize inflation dynamics during the Great Lockdown using scanner data covering millions of transactions for fast-moving consumer goods in the United Kingdom. We show that there was a significant and widespread spike in inflation. First, aggregate month-to-month inflation was 2.4% in the first month of lockdown, a rate over 10 times higher than in preceding months. Over half of this increase stems from reduced frequency of promotions. Consumers' purchasing power was further eroded by a reduction in product variety, leading to a further 85 basis points increase in the effective cost of living. Second, 96% of households have experienced inflation in 2020, while in prior years around half of households experienced deflation. Third, there was inflation in most product categories, including those that experienced output falls. Only 13% of product categories experienced deflation, compared with over half in previous years. While market-based measures of inflation expectations point to disinflation or deflation, these findings indicate a risk of stagflation should not be ruled out. We hope our approach can serve as a template to facilitate rapid diagnosis of inflation risks during economic crises, leveraging scanner data and appropriate price indices in real-time.
Keywords: inflation; great lockdown
JEL Codes: D12; E31; I30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| reduction in promotional transactions (L14) | significant spike in month-to-month inflation (E31) |
| reduction in product variety (L15) | additional increase in effective cost of living (J39) |
| significant spike in month-to-month inflation (E31) | 96% of households experienced inflation (D19) |
| inflation across product categories (E31) | only 13% experienced deflation (E31) |
| inflation experiences of households (E31) | risk of stagflation (E31) |