Changed consumption during the pandemic affects inflation

Economic Commentaries, News The pandemic has significantly changed how and what we consume. Jesper Johansson, Mårten Löf and Oskar Tysklind explain in an Economic Commentary how our new consumption patterns affect inflation and the way it is measured.

During the pandemic we are flying less and not visiting restaurants and cinemas so much. Instead, we are buying more food and doing more renovations at home. The prices of the products we no longer consume as much have in many cases increases relatively slowly or fallen, while the prices of the products we are consuming more of have instead increased relatively quickly.

As the calculations of CPIF inflation in 2020 are largely weighed together using weights based on how consumption looked in 2018, the rate of increase in the prices paid by an average household is underestimated. This is because the prices that have increased relatively slowly take on an overly large significance in the calculations, while those that have increased rapidly are instead given too little significance. If the calculations had instead been based on the actual consumption during this pandemic year, the rate of inflation in 2020 would probably have been somewhat higher.

The authors show that these changes affect the inflation rate in coming years. When Statistics Sweden updates the weights in the CPIF next year, they will use a more up-to-date base for their calculations than they usually use. This will probably mean that the rate of CPIF inflation measured will be a couple of tenths of a percent higher than it would otherwise have been next year.

By Jesper Johansson, Mårten Löf and Oskar Tysklind. The authors work in the Monetary Policy Department at the Riksbank.

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Updated 18/12/2020