Come out, come out, wherever you are. Or, if you’re somewhere in lockdown, perhaps not. The pandemic has led to the disappearance of inflation — at least if you look at the official statistics. In the eurozone, prices in the year to October fell by 0.3 per cent; in the US they rose by a paltry 1.2 per cent over the same period. But was inflation merely hiding in plain sight? And if so, where?
As in the past, official measures may be underestimating the degree to which prices for the average consumer are still rising. The reason being that the pandemic has upended our spending habits.
But neither the index in the UK, nor indices elsewhere have been recalculated since — meaning the official measures overestimate the benefit to the average consumer of dirt-cheap plane tickets and underestimate the impact of rises in food prices. To address this, the National Institute of Social and Economic Research in the UK has created a .
But how significant are the disparities globally? According to IMF published last week, they’re big.
The research, which was — like to quantify “true” inflation by Harvard’s Alberto Cavallo — based on credit and debit card payments, covered eight geographical regions. It looks at the difference between a Covid-19 measure of inflation and official estimates between February and May, when first waves were upon us.
In seven of the eight regions, official measures underestimated price pressures for the average consumer. Inflation’s got lost in the supermarket, with the underestimation of food costs among the the biggest contributors to the disparity — alongside the overestimation of the impact of lower transport costs. Here’s a chart which does a great job of summarising the findings:
The article is, as the author Marshall Reinsdorf acknowledges, not the last word on the topic and ought not to replace consumer price indices and other official measures. Still, given the scale of the disparities, there’s a case for a separate Covid-19 index. Via the paper:
Weight adjustments based on credit card and payments data would likely be too inaccurate and incomplete to incorporate into the official CPI, but a supplementary COVID-19 index could provide useful information on the prices being paid by consumers during the pandemic. An acceleration of the normal timetable for rebasing the CPI may also be warranted if the normal cycle for rebasing would delay the next updating of the weights past 2022.
We’d recommend policymakers take hidden inflation seriously, and — lockdown or not — seek it out into the open as soon as possible.