Prices over the Product Life Cycle: Implications for Quality-Adjustment and the Measurement of Inflation
33 Pages Posted: 15 Oct 2013 Last revised: 29 Oct 2013
Date Written: October 29, 2013
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 US 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 and at sample rotations. This introduces a systematic bias in the measurement of inflation. For our data we find that the life cycle bias underestimates the measurement of inflation by around 0.30 percentage points each year.
Keywords: Consumer price index (CPI), cost of living, matched-model index, quality change bias, sample rotation, scanner data
JEL Classification: C43, D22, E31
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