Price Discounts and the Measurement of Inflation

Abstract

Consumers are very responsive to sales, yet statistical agency practice typically under-weights sale prices in the Consumer Price Index (CPI), with some agencies excluding sale prices completely. Evidence is lacking on how this may impact on both the representativeness of prices included in the CPI and on estimates of inflation. We use high-frequency scanner data from US supermarkets to explore if there is any systematic directional impact. The key finding is that the exclusion of sales prices introduces a systematic effect. We also find that even when sales prices are included they are systematically under-weighted, but the under-weighting remains fairly stable over time so that inflation measurement is not significantly affected.

Keywords: Cost-of-living, CPI, Regular prices, Retail sales, RYGEKS, Scanner data

JEL Classification: C43, E31