Inflation and the Relative Price Premium

69 Pages Posted: 3 Jan 2023 Last revised: 25 Jul 2023

See all articles by Yun Joo An

Yun Joo An

Indiana University - Kelley School of Business - Department of Finance

Fotis Grigoris

University of Iowa - Department of Finance

Christian Heyerdahl-Larsen

BI Norwegian Business School

Preetesh Kantak

Kelley School of Business

Date Written: January 1, 2023

Abstract

This study shows that relative price dispersion impacts risk premia. Notably, firms associated
with goods and services that have increased (decreased) in price relative to the headline inflation
rate earn high (low) returns. We refer to this return spread of 0.88% per month as the relative
price premium. We rationalize the premium via a consumption-based asset-pricing model that
features imperfectly substitutable goods and an investor with preferences for the mix of goods
consumed. As shocks to relative prices induce the investor to consume a suboptimal bundle of
goods, high price dispersion signals bad times for the investor and the economy.

Keywords: Relative Prices, Asset Prices, Inflation, CPI, Dispersion

Suggested Citation

An, Yun Joo and Grigoris, Fotis and Heyerdahl-Larsen, Christian and Kantak, Preetesh, Inflation and the Relative Price Premium (January 1, 2023). Available at SSRN: https://ssrn.com/abstract=4316133 or http://dx.doi.org/10.2139/ssrn.4316133

Yun Joo An

Indiana University - Kelley School of Business - Department of Finance

Fotis Grigoris (Contact Author)

University of Iowa - Department of Finance ( email )

Iowa City, IA 52242-1000
United States

Christian Heyerdahl-Larsen

BI Norwegian Business School ( email )

Nydalsveien 37
Oslo, 0442
Norway

Preetesh Kantak

Kelley School of Business ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States

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