Mikael Carlsson (Uppsala University)

Micro PPI-Based Real Output Forensics

Abstract: This paper quantifies the implications of index construction choices on the measured aggregate inflation rate using Swedish producer-price microdata. We derive the price index from a nested CES preference structure consistent with the two-tier aggregation structure applied by statistical offices, nesting the arithmetic (geometric) indices with the elasticity of substitution across items set to zero (unity). Increasing this elasticity from zero to unity decreases annual goods and services inflation by 0.5 and 0.4 pp, respectively. Moving instead to estimated elasticities lowers annual goods and services inflation by 3.9 and 2.7 pp. We show how to approximate the CES price index for any elasticity with three moments of the distribution of price changes.