“The True Cost of Living: 1974–17199133ya”, 1998-05-19 (; backlinks; similar):
This first purpose of this paper is to use the PSID to see whether the anomalies of Figure 1 & Figure 2 can be attributed to some non-CPI cause such as demographics or changes in the distribution of income. The second purpose is to offer a more refined estimate of CPI bias. Third, I will present evidence of strikingly different inflation rates by race. Using the PSID, I estimate a demand function for food at home 1974–17199133ya. Using a standard measure of real income (total family income after federal taxes, the PSID’s best continuously available approximation of disposable income)10 deflated by the CPI, this demand function has shown consistent drift over the sample period; I attribute this drift to unmeasured growth in real income, and in turn I attribute the mismeasurement of income to CPI bias.
In a nutshell, the results are as follows: On average, in 1974 the PSID sample11 of white households spent 16.64% of its income on at-home food. By 1991 this share had fallen to 12.04%. Measured per-household income grew 7% over this time span, explaining just over half a point of the food-share decline. Decline in the relative CPI of food is sufficient to explain perhaps as much as 1 percentage point of decline in food’s share. Other regressors accounts for less than 0.1 point of additional decline; thus about 3 points of the food-share decline are left to be explained by CPI bias. I estimate that this bias is about 2.5% per year from 1974 through 1981, and slightly under 1% per year since then.
For blacks, food’s share fell 21.17% → 12.44%. ~0.8 point of the decline can be explained by measured income growth, and another point by movement in other regressors, and up to another 1 point by the decline in the food CPI. Thus the food-share decline left to be explained by measurement error is 5.9 points. I estimate the bias to be ~4% per year from 1974 through 1981 and about 3% per year since then.
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