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

25 Pages Posted: 16 Aug 2016

See all articles by Daniel Melser

Daniel Melser

Moody's Economy.com

Iqbal A. Syed

UNSW Australia Business School, School of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: September 2016

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 U.S. 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

Suggested Citation

Melser, Daniel and Syed, Iqbal A., Life Cycle Price Trends and Product Replacement: Implications for the Measurement of Inflation (September 2016). Review of Income and Wealth, Vol. 62, Issue 3, pp. 509-533, 2016. Available at SSRN: https://ssrn.com/abstract=2824047 or http://dx.doi.org/10.1111/roiw.12166

Daniel Melser (Contact Author)

Moody's Economy.com ( email )

Level 10
1 O'Connell St
SYDNEY, 2000
Australia

Iqbal A. Syed

UNSW Australia Business School, School of Economics ( email )

High Street
Sydney, NSW 2052
Australia

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