Title: From Exposure to Experience: Consumer-level Inflation and Substitution
Author: Merike Kukk (Eesti Pank, TalTech, Aalto University)

Abstract:

This paper studies heterogeneity in food inflation by distinguishing fixed-basket inflation exposure from experienced inflation after expenditure reallocation. Using barcode-level retail scanner data from Estonia for 2014–2018, covering a deflationary and a subsequent inflationary episode, we construct quarterly year-on-year consumer-level Laspeyres, Paasche, and Fisher food price indices. We show that consumers with lower-priced baskets face higher inflation exposure but reallocate expenditure substantially more than those with higher-priced baskets. During inflation, their experienced food inflation is about one-third (3.1 pp) lower than their exposure; during deflation, their experienced deflation is about four times (2.8 pp) deeper. These differences are negligible for consumers in the high-price tier as they hardly engage in price substitution. These findings highlight that substitution is heterogeneous and regime dependent, and that fixed-basket measures can overstate inflation inequality and overlook the role of consumer substitution in realized inflation.

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