Household Inflation and Aggregate Inflation

Abstract

This project postulates that an additional cost of increased inflation is an increase in the cross-sectional dispersion of household-level inflation rates. Using scanner data and the Consumer Expenditure Survey, I construct novel measures of household-level inflation and show that households experience inflation at very different rates. An increase in a household's personal inflation rate leads to a persistent increase in their price index. Households respond to a personal inflation shock by decreasing nominal consumption, which means that real consumption falls more than one-for-one; poor households are least able to smooth their consumption in response to household inflation shocks. I find that inflation dispersion (the variance of household inflation rates) increases with the level of absolute aggregate inflation. This relationship is robust across time, methodology, and data.