HETEROGENEITY IN PRICES PAID AND IN RATES OF INFLATION

The fact that individuals and groups differ one from the other in their broad consumption patterns, in the kinds and qualities of goods they buy, and in the prices they pay is not itself enough to produce differences in the rate of inflation or the rise in the cost of living they experience. To the extent that relative prices do not change very much over time, the rates of inflation for individuals and groups cannot, of course, differ very much from each other. But relative prices are continually changing. There is some evidence that the higher the overall rate of inflation and the greater the degree of economic disruption, the larger is the variation in relative prices. Moreover, there are periods when inflation is dominated by the rapid rise in the price of one or a few commodities—oil and other energy prices in the 1970s and early1980s and, to a lesser extent, health care costs in the late 1980s and early 1990s. Yet the existence of significant alterations in relative prices will not itself produce important differences in the rate of inflation faced by different groups unless, on average, the collection of prices for the kinds and qualities of goods typically purchased by one group rises faster or slower than the collection of prices of the kinds and qualities of goods purchased by other groups.

Such systematic differences do exist. Lower-income consumers in the northern states are particularly affected in the winter months by increases in the relative price of heating oil; the elderly, even with Medicare, tend to be hit hardest by above-average increases in health care costs. Unless these increases are fortuitously offset by relative price declines in other goods of which they are also especially heavy consumers, the rate of inflation they face will exceed that for the population as a whole. Some observers point out that quality improvements and technological advances, which present one of the most difficult issues in price index calculation, are more prevalent among the types of goods purchased by rich than by poor households and that the rich are the first to acquire such goods. As a consequence, an overall price index corrected for quality change runs the risk of understating inflation for the poor, even if it accurately incorporates the effect of quality change for those who can afford to buy new and improved goods. Others argue that this phenomenon may be partly offset by a “trickle-down” effect of quality change. To the extent that technology produces goods with new characteristics and lower-quality-adjusted prices, the prices of older models also cascade downward, benefitting groups with less income.

In summary, different groups of consumers will experience significantly different rates of inflation whenever three conditions all occur: There are substantial differences in what consumers buy and the prices they pay; there are significant changes in the relative prices of goods; and the distribution of those changes is such as, on average, to raise or lower the prices of the collection of goods typically bought by some groups of consumers relative to the prices of those



The National Academies | 500 Fifth St. N.W. | Washington, D.C. 20001
Copyright © National Academy of Sciences. All rights reserved.
Terms of Use and Privacy Statement