Revisiting taste change in cost-of-living measurement

Article type: Research Article

Authors: Martin, Robert S.

Affiliations: Division of Price and Index Number Research, Bureau of Labor Statistics, 2 Massachusetts Ave, NE, Washington, DC 20212, USA | E-mail: [email protected]

Correspondence: [*] Corresponding author: Division of Price and Index Number Research, Bureau of Labor Statistics, 2 Massachusetts Ave, NE, Washington, DC 20212, USA. E-mail: [email protected].

Abstract: This paper compares conditional and unconditional cost-of-living indexes (COLI) when tastes change, focusing on the Constant Elasticity of Substitution model. A consumer price index typically targets a conditional COLI, which evaluates price change given set of preferences. An unconditional COLI aims to also capture the welfare effects of changing tastes, but it requires stronger assumptions. Using retail scanner data for food and beverage products, I find COLIs conditioning on current period tastes exceed those conditioning on prior period tastes. Consistent with previous studies, I find an unconditional COLI tends to reflect negative direct contributions from taste change.

Keywords: Cost of living index, price index, taste change

DOI: 10.3233/JEM-220485

Journal: Journal of Economic and Social Measurement, vol. 46, no. 2, pp. 109-147, 2022