ABSTRACT
We investigate the prices and quantities of face masks when the 2020 COVID-19 pandemic was particularly serious to understand the impact of demand shocks on the cost of living index (COLI). Using a recently developed index number formula that is exact for the constant elasticity of substitution utility function with variable preferences, we quantified the degree of demand shock caused by the pandemic. Our empirical analysis revealed that shifts in preferences during the pandemic were so large that the COLI with variable tastes became very different from the standard superlative indexes. While the prices of face masks decreased in the Fisher index in May 2020 by 0.76% per week, the COLI increased by 1.92% per week.
ABSTRACT
Diewert and Fox (2022) examine various implications of the 2020 COVID-19 pandemic for constructing consumer price indexes. The authors state that the pandemic caused major changes in consumption expenditures and shares which makes fixed basket index number formulae inapplicable. They emphasize the need for more frequent surveys of consumer expenditure which will enable compilation of the Fisher index which is considered superior to the traditional Laspeyres or Young indexes. In addition, Diewert and Fox discuss the use of various “new” technologies such as web scraping, scanner data, and information from transactions through credit cards to estimate consumption expenditure.