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

Abstract

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.

Keywords: Consumer price index (CPI), matched-model index, price skimming strategy, quality change bias, sample rotation

JEL Classification: C43, D22, E31