How the virus disrupted inflation statistics


The earthquake devastation caused by the pandemic suddenly and completely changed the consumption patterns of consumers around the world, making official inflation data irrelevant to what they experienced.

Soaring prices in many major economies are worrying investors and central bank officials.But part of this trend can be blamed on Coronavirus disease — Have an important impact on the way we interpret official data.

Inflation is measured using a basket of goods and services, which means what people usually buy. The weight of items is directly proportional to the amount spent on them.

Inflation: a new era?

Prices in many major economies are rising. The British “Financial Times” investigates whether inflation will recover permanently.

Day 1: For decades, advanced economies have not faced rapidly rising inflation. Is this going to change?

Day 2: Central Bank Governors reach a global consensus on how to best promote low and stable inflation Has collapsed.

Day 3: The coal mine canary of U.S. inflation: Second-hand car.

Day 4: How the virus destroys official inflation statistics.

Day 5: Why price increases in developed economies are a problem for debt-ridden developing countries.

In the past year, as the pandemic has spread, people around the world have almost stopped spending on restaurants, air tickets and other activities restricted by the lockdown almost overnight.

Therefore, the practical experience of some countries inflation According to research by Harvard University professor Alberto Cavallo, the difference from the official headline interest rate was as high as 0.89 percentage points in one month last summer.According to Cavallo’s estimates, the U.S. inflation rate in 2020 may be underestimated by 5.5%.

Economists warn that this chaos will continue as major economies shift to more normal consumption patterns — making it more difficult to interpret the official price change indicators that make up the central bank’s main policy goals.

The details of inflation calculations in the United States and the Eurozone are different, but both methods pose the same challenges.

U.S. calculation does not match

The survey data used by the US Bureau of Labor Statistics lags behind the changes in the real world by two years. Therefore, since the beginning of the pandemic, official inflation data has been calculated using weights that reflect the world before the pandemic.

Mistakes are particularly serious in the two categories.

The line chart of percentage changes in credit and debit card spending shows that the lockdown has forced major changes in U.S. spending patterns

According to Opportunity Insights credit and debit card purchase data, grocery spending increased by 29% in March last year. The surge in demand pushed prices up by 2.7% month-on-month.

In contrast, transportation expenditures fell by 70% in April last year, and prices fell by 7% from the beginning of the year. This effect has continued: In May of this year, transportation expenditures were still 25% below pre-pandemic levels.

According to economists, the net effect is that the officially calculated consumer price index underestimates the price changes that people experience in daily life.

Miguel Faria e Castro, an economist at the Federal Reserve Bank of St. Louis, said: “You can easily understand why CPI does not measure inflation well during a pandemic recession.” “This recession has caused an unprecedented shift in the composition of household consumption.”

As U.S. economy The reopening and blockade ended, and the effect has been reversed.

For example, the decline in car and truck production in the past year has pushed up used car prices. Since Americans have spent less on transportation since the beginning of the pandemic than CPI-weighted shows, the official inflation reading for April— Recorded a big jump ——It may be overestimated.

The percentage line chart shows that the official U.S. CPI underestimated inflation during the pandemic

“In April, the reason for the one-third increase was actually used cars and trucks. This was a big driver,” said Cavallo, who used Opportunity Insights real-time spending data to reweight the CPI basket. Items to more accurately reflect recent price changes.

“The CPI basket should reduce [transport], with [then] Inflation readings in April were lower,” he said.

European reset problem

Unlike the United States, the Eurozone inflation weights are updated every January. Changes in consumption patterns during the pandemic mean that this year’s calculations will not have much impact on the prices of petrol, hotels and restaurants that were affected by the lockdown last year.

Weighted line chart (out of 1,000 items), selected items show unprecedented changes in inflation weights in certain Eurozones

Therefore, even if European consumers return to their pre-pandemic spending patterns as the economy returns to normal, official statistics will underestimate spending in these areas.

ING economist Carsten Brzeski said that “interpreting this year’s inflation data is not easy” because spending during the pandemic is not only during the lockdown “but also will cause distortions later in the year. ” [consumers] Return to normal consumption patterns”.

Gregory Claeys of Bruegel, an economic think tank, said this means that official inflation statistics are “not too accurate.” He warned: “We will face the same problems as last year, but the situation has reversed.”

The effect may be significant. For example, in 2021, the weights of leisure and personal services, restaurants and hotels will fall by 40 and 30 basis points respectively from the previous year. In the past 24 years, these expenditure areas have changed only 0.6 basis points per year on average.

This problem is already obvious in gasoline: last year both prices and consumption have fallen. Gasoline prices are now rising again, but their impact on overall inflation calculations will be 13% smaller than last year-this impact will continue until the euro zone inflation basket is reset again in January. The same trend may be seen in hotels and movie theaters.

A bar chart of Eurozone inflation in January 2021, calculated using two different weights (annual percentage changes), showing that the changes in the weights promote the increase in Eurozone inflation

European Central Bank Calculation The inflation experienced by consumers last year was 0.2% higher than the official CPI from April to August, and the weight changes this year Push up the inflation rate An increase of 0.3% in January.

Allianz senior economist Katharina Utermöhl stated that policymakers “need to pay attention to this and test alternative measures to better understand actual inflation dynamics”-because these statistical glitches continue to cause severe damage to the CPI in the coming months .


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