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Consumer Inventory and the Cost of Living Index: Theory and Some Evidence from Japan
Abstract
This paper examines the implications of consumer inventory for cost-of-living indices (COLIs) and business cycles. We begin by providing stylized facts about consumer inventory using scanner data. We then construct a quasi-dynamic model to describe consumers’ purchase, consumption, and inventory behavior. A key feature of our model is that inventory is held by household producers, not by consumers, which enables us to construct a COLI in a static manner even in an economy with storable goods. Based on this model, we show that stockpiling during temporary sales generates a substantial bias, or so-called chain drift, in conventional price indices, which are constructed without paying attention to consumer inventory. However, the chain drift is greatly mitigated in our COLI, which is based on consumption prices (rather than purchase prices) and quantities consumed (rather than quantities purchased). We provide empirical evidence supporting these theoretical predictions. We also show empirically that consumers’ inventory behavior tends to depend on labor market conditions and the interest rate.
Introduction
Storable goods are abundant in the real world (e.g., pasta, toilet rolls, shampoos, and even vegetables and milk), although most economic models deal with perishable goods for the sake of simplicity. Goods storability implies that purchases (which are often observable) do not necessarily equal consumption (which is often unobservable), and the difference between the two serves as consumer inventory. In particular, temporary sales and the anticipation of an increase in the value-added tax rate often lead to a greater increase in purchases than consumption. Moreover, the COVID-19 outbreak in 2020 caused many products, such as pasta and toilet rolls, to disappear from supermarket shelves, which would not have happened if these products were not storable. The stockpiling behavior by consumers poses challenges for economists, for example in the construction of price indices.
WP025