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The seismic economic disruption of the pandemic has suddenly and radically changed consumer spending patterns around the world, without exploring official data on inflation since they are experiencing it.
The rise in price growth in many major economies is a concern for investors and central banks. But part of that trend can be blamed Covid-19 – which has important implications for how we interpret official data.
Inflation is measured using a basket of goods and services to represent what people normally buy. They are proportional to the amount spent on the items.
Inflation: a new era?
Prices are rising in many major economies. The FT examines whether inflation has finally returned.
DAY 1: Advanced economies have not coped with rapid inflation growth for decades. Is that about to change?
DAY 2: How to better promote low and stable inflation among central banks has broken down.
DAY 3: Canary from the coal mine due to US inflation: used cars.
DAY 4: How a virus can disrupt official inflation statistics.
DAY 5: Why they are raising prices in advanced economies for developing countries that are borrowing.
When the pandemic hit the world over the past year, people stopped spending almost overnight in restaurants, fares and other blocked activities.
As a result, real-world experience in some countries inflation According to a study by Harvard professor Alberto Cavallo, last summer there was a difference of 0.89 percentage points in a single month with the official headline rate. Cavallo estimates that U.S. inflation will be 5.5 percentage points lower by 2020.
Economists warn that major economies will continue to return to more normal consumption patterns, making it more difficult to interpret the official price change measures that make up the primary policy goal of central banks.
Details of US and eurozone inflation calculations are different, but the two methods pose the same challenge.
U.S. calculation imbalance
The U.S. Bureau of Labor Statistics uses data from surveys that delay real-world change by two years. So since the pandemic began, official inflation data have been calculated using weights that reflect the world before the pandemic.
The measurement is incorrect especially in two categories.
Food spending rose 29 percent in March last year, according to Opportunity Insights credit and debit card purchase data. The rise in demand saw prices rise 2.7 percent month-on-month.
In contrast, transport costs fell by 70 per cent in April last year and prices fell by 7% since the beginning of the year. The impact has continued: transport spending was 25% lower than the previous pandemic level in May this year.
According to economists, the net effect is that the official calculation of the consumer price index has underestimated the price changes in the daily life of the population.
“It is easy to see why CPI inflation was a poor measure during the pandemic recession,” said Miguel Faria e Castro, an economist at the Federal Reserve Bank of St Louise. “This recession led to an unprecedented change in the composition of household consumption.”
As US economy reopen and end the locks, the effect has been reversed.
For example, the decline in car and truck production over the past year has raised the prices of used vehicles. As Americans have spent less on transportation costs since the pandemic began, the CPI’s weighting suggests that the official April inflation reading, which is he recorded a great jump – was probably overestimated.
“In April, a third of the jump was caused by used cars and trucks. That was a big factor in that, ”Cavallo said, using real-time expense data from Opportunity Insights to more accurately reflect recent price changes to re-weigh items in the KPI basket.
“The KPI basket had to put less weight on it [transport], and [then] you will get a lower inflation reading in April, ”he said.
The problem of European restoration
Unlike the US, the eurozone inflation weight is updated annually in January. Changes in the pandemic’s consumption patterns mean that this year’s estimates will give little weight to the prices of items like gasoline, hotels and restaurants last year.
As a result, even as European consumers return to pre-pandemic spending patterns as the economy normalizes, official statistics underestimate spending in these areas.
Carsten Brzeski, an economist at ING, said that “interpreting this year’s inflation data is not an easy task” because pandemic spending “not only creates closures but also distortions” later this year. [consumers] returning to normal consumption patterns ”.
This means that official inflation statistics are “not so accurate,” Gregory Claeys said in the economic think tank Bruegel. “We will have the same problem as last year, but vice versa,” he warned.
The impact could be significant. For example, the weighting of leisure and personal services and restaurants and hotels fell by 40 and 30 basis points in 2021, respectively, compared to the previous year. Over the last 24 years, on average, these spending areas change by 0.6 basis points annually.
The issue is already visible in the case of gasoline: both prices and consumption volumes fell last year. Oil prices are rising again, but the impact of the overall inflation calculation will be 13% lower than last year, and that effect will last until the eurozone inflation basket is re-established in January. The same trend could happen with hotels and cinemas.
European Central Bank calculated last year consumer inflation was 0.2 percentage points higher than the official CPI between April and August, and this year the weight change it pushed up the inflation rate 0.3 percentage points in January.
Katharina Utermöhl, chief economist at Allianz, said policymakers “should take this into account and test alternative measurement methods to better understand the real dynamics of inflation” – these statistical problems continue to wreak havoc on the CPI in the coming months.
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