A Distributional PCE Price Index From Aggregate Data
Annualised inflation ratesAbstract
We propose a method for constructing nonhomothetic cost-of-living indices when detailed consumption microdata is unavailable. Aggregate prices and expenditure shares together with a single cross-sectional distribution of consumption are sufficient to create a nonhomothetic distribution of cost-of-living indices with our approach. The index is derived from nonhomothetic CES preferences, nests conventional price indices as special cases, and only requires the estimation of one parameter: the elasticity of substitution between necessities and luxuries. The underlying preferences aggregate consistently, which allows us to identify this parameter from aggregate data. We implement the approach using US Personal Consumption Expenditure (PCE) data and construct a nonhomothetic PCE price index covering 72 product groups. This index exhibits annual inflation rates of the poorest ten percent that exceed those of the richest ten percent by 0.8 to 1.1 percentage points throughout most of 2022 to date, thus suggesting that poorer households are hit substantially harder by the current inflation surge.
