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Economic Quarterly

Winter 2005

Inflation and Changing Expenditure Shares

Alexander L. Wolman and Fan Ding

Inflation reflects the joint behavior of price changes for individual goods and expenditure shares of different goods. We measure the contribution of changing expenditure shares to inflation behavior by constructing alternative inflation measures that hold fixed the weights on price changes for different goods. The role of changing expenditure shares is revealed by the divergence between the behavior of actual inflation and the fixed-weight measures. The broad features of inflation over the past 50 years cannot be accounted for by changing expenditure shares. However, in more subtle ways, changing expenditure shares have been important for the behavior of inflation. For example, the shift toward services has tended to make the overall inflation rate higher, other things equal.

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