How the virus altered inflation statistics

The seismic economic turmoil of the pandemic has radically and radically changed consumer spending patterns around the world, leaving official inflation data unattended to what they are experiencing.

Rising price growth in many major economies worries investors and central bankers. But part of that trend can be blamed Covid-19 – with important consequences for the way we interpret the official data.

Inflation is measured by a basket of goods and services that aims to represent what people normally buy. Items receive weights proportional to the amount invested in them.

All over the world over the past year, as the pandemic consolidated, people stopped spending virtually overnight on restaurants, air fares and other activities restricted by blockade.

As a result, the experience of the real world of some countries inflation differed from the official bond rate by up 0.89 percentage points in a single month last summer, according to research by Cavarardo professor Alberto Cavallo. According to Cavallo’s estimates, US inflation may have been underestimated by 0.5 percentage points throughout 2020.

Dislocation will continue as major economies return to more normal consumption patterns, economists have warned, making it more difficult to interpret official price change measures that are the main goal of central bank policy.

Details of US and eurozone inflation calculations are different, but both methods pose the same challenge.

The US calculation mismatch

The U.S. Bureau of Labor Statistics uses survey data that causes real-world changes to be delayed by two years. Thus, since the pandemic began, official inflation data have been calculated using weights that reflect the pre-pandemic world.

Incorrect measurement is particularly acute in two categories.

Grocery spending rose 29% in March last year, according to Opportunity Insights credit and debit card purchase data. The increase in demand boosted prices by 2.7% month-on-month.

By contrast, transport spending fell by 70% in April last year and prices fell by 7% since the beginning of the year. The effect has lasted: transportation spending was still 25% lower than pre-pandemic levels in May this year.

According to economists, the net effect is that the official calculation of the consumer price index underestimated the price changes experienced by the population in their day-to-day lives.

“You can easily see why the CPI was a poor measure of inflation during the pandemic recession,” said Miguel Faria e Castro, an economist at the Federal Reserve Bank of Saint Louis. “This recession led to an unprecedented change in the composition of domestic consumption.”

Like the American economy it reopens and the lock ends, the effect has been reversed.

For example, a drop in the production of cars and trucks over the last year has raised the prices of used vehicles. Given that Americans have spent less on transportation since the beginning of the pandemic than the CPI weighting suggests, the official April inflation reading, which recorded a big jump – It was probably an overvaluation.

“In April, what caused a third of the jump was really in used cars and trucks. That was a big boost, ”said Cavallo, who has used Opportunity Insights’ real-time spending data to re-weigh CPI basket items to more accurately reflect recent price changes .

“The CPI basket should have weighed less [transport], i [then] you will get a lower inflation reading than in April, ”he said.

The problem of European re-establishment

Unlike the US, euro area inflation weights are updated annually in January. Changes in consumption patterns during the pandemic mean that this year’s calculation will give little weight to the prices of items such as petrol, hotels and restaurants, affected by blockades last year.

As a result, even if European consumers return to pre-pandemic spending patterns as the economy normalizes, official statistics underestimate spending in these areas.

Carsten Brzeski, an ING economist, said that “interpreting this year’s inflation data will not be an easy task,” as spending in the pandemic era creates distortions not only during deadlocks. also later this year with [consumers] returning to normal consumption patterns ”.

That means official inflation statistics are “less accurate,” Gregory Claeys told economic think group Bruegel. “We will have the same problem as last year, but reversed,” he warned.

The effect could be significant. For example, the weighting of personal and leisure services and restaurants and hotels fell 4 and 3 percentage points respectively in 2021 compared to the previous year. On average, in the last 24 years, these spending areas have only changed 0.06 percentage points annually.

The problem is already visible in the case of gasoline: both the volume of prices and consumption fell last year. Gasoline prices are now rising again, but their influence on the overall calculation of inflation will be 13% lower than last year, and this effect will last until the basket of inflation in the euro area re-established in January. The same trend could happen with hotels and cinemas.

The European Central Bank calculated that consumer inflation last year was 0.2 percentage points higher than the official CPI between April and August, and the change in weights this year drove the inflation rate upwards 0.3 percentage points in January.

Katharina Utermöhl, senior economist at Allianz, said policymakers “will have to take note of this and try alternative measurement methods to better understand the real dynamics of inflation,” as these statistical errors continue to wreak havoc on the ‘CPI in the coming months.

This article has been modified since publication to correct for the change in the weights of the European inflation index and the amount by which US inflation could be underestimated in 2020.