Title: When Weights Matter: Expenditure Reallocation and Food Inflation Across the Price Distribution
Authors: Merike Kukk (TalTech, Department of Economics and Finance), Tõnn Talpsepp (TalTech, Department of Economics and Finance)

Abstract:

This paper highlights the importance of weights in measuring food inflation across the product price distribution. Using barcode-level retail scanner data from Estonia for 2014–2018, we compare base-period-weighted and current-period-weighted year-on-year price changes for food and non-alcoholic beverages. We document consumer purchases are highly concentrated in relatively low-priced products: about one third of purchases are made in the lowest price quintile within product groups, and around 70% are made below the median. Expenditure weights change the measured inflation dynamics, as consumers reallocate expenditure away from products with price increases and toward products with price declines, so base-period weights overstate price increases and understate the role of price decreases. Price dynamics differ systematically across price deciles and across regimes, during deflation lower-priced products experienced deeper deflation, whereas during inflation it was higher in the lower and middle parts of the price distribution. These findings show that expenditure weights and expenditure reallocation are important for understanding measured inflation.

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