Discussion Paper

Measuring Price Inflation and Growth in Economic Well-Being with Income-Dependent Preferences

Abstract: How can we accurately measure changes in living standards over time in the presence of price inflation? In this post, I discuss a novel and simple methodology that uses the cross-sectional relationship between income and household-level inflation to construct accurate measures of changes in living standards that account for the dependence of consumption preferences on income. Applying this method to data from the U.S. suggests potentially substantial mismeasurements in our available proxies of average growth in consumer welfare in the U.S.

Keywords: real consumption; welfare; growth; Inflation; inequality; nonhomothetic preferences;

JEL Classification: D63; E2; E31;

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Bibliographic Information

Provider: Federal Reserve Bank of New York

Part of Series: Liberty Street Economics

Publication Date: 2024-01-08

Number: 20240108