Inflation Spike and Falling Product Variety During the Great Lockdown

35 Pages Posted: 16 Jun 2020

See all articles by Xavier Jaravel

Xavier Jaravel

London School of Economics & Political Science (LSE) - Department of Economics

Martin O'Connell

Institute for Fiscal Studies (IFS)

Date Written: June 2020

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: Great Lockdown, inflation

JEL Classification: D12, E31, I30

Suggested Citation

Jaravel, Xavier and O'Connell, Martin, Inflation Spike and Falling Product Variety During the Great Lockdown (June 2020). CEPR Discussion Paper No. DP14880, Available at SSRN: https://ssrn.com/abstract=3628201

Xavier Jaravel (Contact Author)

London School of Economics & Political Science (LSE) - Department of Economics ( email )

Houghton Street
London WC2A 2AE
United Kingdom
7456842728 (Phone)
NW12AR (Fax)

Martin O'Connell

Institute for Fiscal Studies (IFS) ( email )

7 Ridgmount Street
London, WC1E 7AE
United Kingdom

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