COVID-19 and the CPI: Is Inflation Underestimated?

IMF Working Papers, November 5, 2020

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COVID-19 changed consumers’ spending patterns, making the CPI weights suddenly obsolete.
In most regions, adjusting the CPI weights to account for the changes in spending patterns increases the estimate of inflation over the early months of the pandemic.
Under-weighting of rising food prices and over-weighting of falling transport prices are identified as the main causes of the underestimation of inflation.
Updated CPI weights should be developed as soon as is feasible, but flux in spending patterns during the pandemic complicates the development as quickly as 2021 of weights that represent post-pandemic spending patterns.

Pandemic-driven shifts in expenditure patterns made existing CPI weights inappropriate for measuring inflation during the early months of COVID-19.
Adjusting CPI weights to reflect observed spending changes generally raises measured inflation in most regions examined.
Specific contributors to underestimation:
- Food: weights were under-weighted relative to rising food prices.
- Transport: weights were over-weighted relative to falling transport prices.

Develop updated CPI weights as soon as is feasible to better reflect current spending patterns.
Recognize that ongoing flux in spending during the pandemic complicates the timely creation of weights that represent post-pandemic spending patterns, potentially delaying stable updates into or beyond 2021.