Robust Empirical Regularities on the Heterogeneity of Inflation Across Consumer Goods
120 Pages Posted: 10 May 2022 Last revised: 12 Dec 2023
Date Written: April 25, 2022
We define the individual excess inflation rate (IEIR) for a consumer good as its individual inflation rate (IIR) minus the CPI inflation rate. We document considerable cross-sectional heterogeneity in consumer goods' IEIRs, which we explain by their differential exposures to a set of macroeconomic factors capturing common sources of price variation. It includes pro-cyclical factors, such as long-term inflation expectations, wages, and consumer sentiment, as well as counter-cyclical factors, such as the unemployment gap, economic policy uncertainty, and financial conditions. Our findings indicate that, on average, 40\% of the variation in IEIR across goods is accounted for by the heterogeneity in goods' price responses to macroeconomic disturbances. Consumer goods with higher price sensitivity to pro-cyclical factors are associated with lower IEIR, while goods with higher price sensitivity to counter-cyclical factors are linked to higher IEIR. These results remain robust after considering other potential drivers, such as the volatility and persistence of disaggregated inflation.
Keywords: Individual Goods Inflation, Phillips Curve, Cross-Sectional Asset Pricing, Fama-MacBeth Procedure, Inflation Risk Premium
JEL Classification: E31, E37, C32, C43, C55, G12
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