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Theoretical Inflation for Unavailable Products

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  • Rachel Soloveichik

    (Bureau of Economic Analysis)

Abstract

Theoretical inflation diverges from official price statistics when products are unavailable due to stay-in-place behavior or due to stockouts caused by supply chain disruptions. In this paper, the word “theoretical inflation” designates inflation that is consistent with price measurement theory (Diewert and Fox 2020) (Diewert et al. 2019). It does not imply computational mistakes or data problems with official price statistics. This paper uses price measurement theory to develop a simple formula to calculate theoretical inflation. The paper then calibrates that simple formula to pre-pandemic research studying online shopping (Dolfen et al. 2021), tourist behavior (Glaeser, Kolko, and Saiz 2001), and stockouts (Corsten and Gruen 2004). Finally, the paper applies the simple formula to empirical data on product unavailability and calculates theoretical inflation by state and month from March 2020 until December 2021. The paper finds large differences between official inflation and theoretical inflation. The official price level increased 1 percent in 2020 and then another 6 percent during 2021. In contrast, the theoretical price level associated with stay-in-place behavior increased 3 percent in 2020 and then decreased 1 percent in 2021 due to a partial return to normal. In addition, the theoretical price level associated with stockouts was minimal in 2020 and then increased 1 percent in 2021 due to supply chain disruptions. In total, the official inflation acceleration of 0.38 percentage point per month in 2021 diminishes to a theoretical inflation acceleration of only 0.15 percentage point per month. The paper also finds that theoretical inflation is higher in states with higher nominal consumption per capita. Hence, a measure of inequality which tracks the relative standard deviation of state income falls by 3 percent when state income is deflated by theoretical inflation.

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  • Rachel Soloveichik, 2022. "Theoretical Inflation for Unavailable Products," BEA Working Papers 0193, Bureau of Economic Analysis.
    • Handle: RePEc:bea:wpaper:0193
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    References listed on IDEAS

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    1. Liebman, Eli & Lawler, Emily C. & Dunn, Abe & Ridley, David B., 2023. "Consequences of a shortage and rationing: Evidence from a pediatric vaccine," Journal of Health Economics, Elsevier, vol. 92(C).
    2. Patrick W. McLaughlin & Alexander Stevens & Shawn Arita & Xiao Dong, 2023. "Stocking up and stocking out: Food retail stock‐outs, consumer demand, and prices during the COVID‐19 pandemic in 2020," Applied Economic Perspectives and Policy, John Wiley & Sons, vol. 45(3), pages 1618-1633, September.

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    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health
    • K32 - Law and Economics - - Other Substantive Areas of Law - - - Energy, Environmental, Health, and Safety Law

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