Revisiting Taste Change in Cost-of-Living Measurement
What is it about?
The economic theory behind a consumer price index traditionally ignores the possibility that preferences for one good versus another tend to change over time. Allowing for preference change in the theory opens up many different techniques corresponding to different questions that one may ask about how the cost-of-living has changed. I compare these techniques using detailed retail transactions data and find that the perspective one chooses in asking questions about inflation has a significant impact on the answers.
Why is it important?
The measurement of inflation is a timely topic in its own right and is also important for measuring real consumption, real output, and productivity. This paper provides a review and comparison of techniques for dealing with changing preferences which will help readers interpret and contextualize other research on the topic.