Sales and the (Mis) Measurement of Price Level Fluctuations

Abstract:     
Using a large set of scanner data from grocery and drug stores located in the US, I show that temporary price reductions (sales) have a large impact on the level of average price paid. Although sales account for about 17 percent of price quotes, roughly 40 percent of revenue occurs at sale prices. Sales also signicantly inuence the dynamics of average price paid. The growth rate of monthly unit price is four times as volatile as that of the regular price. This implies that the quantity response to sales and the frequency and depth of sales varies over time. Following the recession of 2001, average unit price fell by two to three percentage points more than average regular price. Panel regressions suggest a positive relationship between unemployment and the average amount saved from sales. These results imply that the use of CPI item indexes to deate nominal consumption expenditure results in errors that are correlated with the business cycle. This paper adds to the literature that recommends the use of scanner data in price index calculations.

Number of Pages in PDF File: 44

Keywords: Temporary Sales, Micro Pricing, Price Setting Behavior, Inflation

JEL Classification: E3, E31, E01

working papers series