Consumer Prices During A Stay-in-Place Policy: Theoretical Inflation for Unavailable Products

Major product categories like full service restaurant meals, live entertainment, and nonessential personal services are unavailable during a stay-in-place policy. As a result, their inflation rates cannot be measured directly. The standard methodology used by the Bureau of Labor Statistics (BLS) generally assigns a modest inflation rate to unavailable products (BLS 2018). In contrast, price measurement theory (Diewert and Fox 2020) (Diewert et al. 2019) (Diewert 2003) suggests that unavailable products likely have a high theoretical inflation rate. This paper uses previous research on the value of tourist amenities (Florida 2018a) and a newly developed model of tourist behavior to calculate a theoretical inflation rate for unavailable products. This analysis collects data on monthly product unavailability in every region of the United States. Based on that regional data, the paper calculates that the average U.S. consumer experienced theoretical inflation at least 1.2 percentage points higher than the published consumer price index (CPI) in the first quarter of 2020, at least 5.6 percentage points higher than the published CPI in the second quarter, and at least 2.7 percentage points lower than the published CPI in the third quarter. The faster inflation rates in the first two quarters of 2020 reinforces the measured declines in real consumption during those quarters and the slower inflation rate in the third quarter of 2020 reinforces the measured recovery in real consumption during the third quarter. This means that current economic statistics may miss one third of the theoretical decline and recovery in real consumption in the first three quarters of 2020.