Food Price Inflation, Product Entry-Exit and Taste Changes across Income Groups: Evidence from UK Ready Meals Sector.

Abstract

Price indices commonly used to measure inflation do not account for the entry and exit of products nor for systemic changes in consumer preferences over time. Recent developments in the theory of price indices show that these issues have significant impacts on measuring the growth of prices that consumer’s experience and relatedly, consumer utility. However, to execute these developments requires access to household level data. We employ scanner data for the UK ready meals sector for the period 2013-2022 and evaluate the extent of the bias between standard price index measures and those that accommodate product entry and exit as well as changes in tastes. Household data also permits applying these price indices across income groups. Our results show that price indices commonly used to measure inflation significantly overstate the extent of price increases as the process of the net entry/exit of products tends to reduce price levels as do taste changes over time. Moreover, the extent of the bias inherent in standard price indices varies across income groups which, in addition to the impact of product entry/exit also reflects differences in price changes for products in household shopping baskets. These issues are important not only for appropriately measuring cost-of-living and how it varies across income groups but also in addressing policy issues more generally.