Discussion Paper Details

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Title: Sources of Bias in Inflation Rates and Implications for Inflation Dynamics

Author(s): Rahel Braun and Sarah Lein

Publication Date: January 2021

Keyword(s): bias in inflation indexes, Homescan data and Inflation measurement

Programme Area(s): Monetary Economics and Fluctuations

Abstract: Official statistics measuring the cost of living are known to suffer from several biases. This paper shows that the size of the biases can vary with economic conditions. Using homescan data, it is first confirmed that official price indexes can be tracked using such granular datasets. While the often-acknowledged substitution bias is shown to be relatively small, neglected preference adjustment and product entry/exit results in a 2.6 percentage point bias in the annual inflation rate on average. Furthermore, the bias is particularly large in the aftermath of a shock to relative prices, increasing to 3.7 percentage points.

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Bibliographic Reference

Braun, R and Lein, S. 2021. 'Sources of Bias in Inflation Rates and Implications for Inflation Dynamics'. London, Centre for Economic Policy Research.