Data Disruption: The Impact of COVID-19 on Inflation Measurement

IMF Blog, November 10, 2020

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Canonical URL: Data Disruption: The Impact of COVID-19 on Inflation Measurement

Author: Marshall Reinsdorf
Publication date: November 10, 2020
Focus: How abrupt changes in household spending during COVID-19 affect inflation measurement by the consumer price index (CPI)
Timeframe analyzed: February–May
Data adjustment method: CPI weights adjusted using spending estimates derived from credit and debit card data to match pandemic-period spending patterns (example application based on impacts in Canada)

In seven of the eight regions shown, the CPI is below the COVID-19 price index that uses pandemic-adjusted weights.
Average gap (all regions combined) between the COVID-19 index and the CPI over February–May: 0.23 percentage points.
Main positive contributors (increase the COVID-19 index relative to CPI):
- Food: contributes 0.16 percentage points to the world gap.
- Transport: contributes 0.16 percentage points to the world gap.
- Note: Rising food prices contribute to faster growth of the COVID-19 index in all eight regions. Falling transport prices, which have a larger weight in the CPI than in the COVID-19 index, contribute to faster growth of the COVID-19 index in all regions except sub-Saharan Africa.
Main negative contributors (decrease the COVID-19 index relative to CPI):
- Housing: contributes –0.03 percentage points to the world gap.
- Although housing has a higher weight in the COVID-19 index than in the CPI, its price index is so close to the overall CPI that increasing its weight does little to move the COVID-19 index away from the CPI.
- Clothing: contributes –0.08 percentage points to the world gap.
- The downward effect of clothing is due to seasonal price increases having a smaller weight in the COVID-19 basket.

The CPI, with fixed or infrequently updated weights, can understate inflation when spending shares change abruptly (for example, because nonessential items with falling prices lose weight in actual spending but retain higher CPI weight).
The study finds that inflation during the first three months of the pandemic was actually higher than a CPI with unchanged weights indicated.
Practical considerations:
- Quickly updating CPI weights to reflect short-term pandemic spending patterns would be impractical.
- Using weights based on a short timeframe can reduce an index’s accuracy over the longer run.

Statistical agencies should consider developing a supplementary index whose weights reflect spending patterns during the pandemic.
- Purpose: Give policymakers a better picture of the effect of inflation on the prices that consumers are actually paying during periods of rapid spending shifts.

Next week’s 8th IMF Statistical Forum will delve deeper into the data disruptions and challenges arising from the pandemic.

Source: IMF Blog, Marshall Reinsdorf, November 10, 2020.